Bank Indonesia may need to deploy more aggressive measures, including further rate hikes, to sustainably lift the rupiah from near-record lows, according to analysts. Indonesia’s central bank pledged last week to make “necessary adjustments” to its policy tools to maintain rupiah stability as elevated global yields, rising oil prices and the risk of losing its emerging-market status under MSCI Inc. spur foreign outflows. BI had kept its key rate at 5.75%, opting for currency intervention and hedging incentives over monetary tightening that could weigh on the economy. The currency weakened 0.4% on Monday, approaching the historic low notched in early June, with the central bank saying it is monitoring the situation and looking into the root cause of the swings.
The rupiah has weakened some 8% this year against the dollar, neck and neck with the Philippine peso for worst performer in Asia. Analysts expect BI to raise borrowing costs by 25 basis points this quarter and again next year if capital outflows intensify and put further pressure on the rupiah. Goldman Sachs Group Inc. economists including Danny Suwanapruti wrote that Indonesia’s sizable external financing needs and elevated global yields will likely require higher rates to sustain foreign inflows. Under Governor Destry Damayanti’s leadership, BI has shifted away from using its own short-term rupiah securities, known as SRBI, as its primary tool to attract foreign inflows.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing