In an unexpected move on Thursday, Bank Indonesia raised its seven-day reverse repurchase rate by 25 basis points to a four-year peak of 6%, in reaction to growing Israel-Palestine conflict risks and imported inflation worries linked to a weakening rupiah. This marks a policy shift for Governor Perry Warjiyo who had previously signaled that rates would stay put due to a robust dollar.
Despite uncertainty in the financial market and surging global oil prices, which have been worsened by El Nino-induced food supply disruptions, Warjiyo anticipates steady economic growth driven by domestic consumption. Asian central banks continue to tread carefully regarding rate alterations in the face of looming inflation threats.
Bank Indonesia is persistently intervening in the foreign exchange (FX) market and selling rupiah securities to manage volatility. The possible rate hike by the Federal Reserve in November could trigger further selloffs from yield-seeking investors.
The central bank, with its foreign exchange reserves at a 10-month low and dwindling interest in rupiah notes, predicts ongoing capital outflow pressures in Q4. This could affect dollar inflow into Southeast Asia's largest economy.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.