Commerzbank analysts led by Charlie Lay note that Bank Indonesia (BI) kept the BI Rate at 4.75% for a seventh meeting but shifted to a more hawkish stance to support the Indonesian Rupiah (IDR). The bank highlights IDR weakness since the Iran war, elevated USD/IDR above 17,000, and expects BI to rely on FX operations and other tools while maintaining cautious rate policy.

BI stance shifts to Rupiah defence

"Bank Indonesia (BI) left the benchmark BI Rate unchanged at 4.75%, as widely expected, for the seventh consecutive meeting. BI adopted a more hawkish tone, declaring that it is prepared to “implement a further strengthening of monetary policy as needed” to maintain IDR and price stability."

"There seems to be a bit more urgency in the statement to address not only higher inflation expectations, but also IDR volatility. Since early April, USD/IDR has stayed above the psychological 17,000 level."

"IDR has declined by 2.5% against the USD since the Iran war began. It is buffeted by a number of issues, including mounting concerns over BI’s independence, the abrupt dismissal of fiscal disciplinarian and former Finance Minister Sri Mulyani, and a possible downgrade to frontier market status by MSCI."

"Given the uncertainties in the Middle East and impact on inflation, BI may adopt a cautious approach on rates and implement other measures, such as spot and NDF intervention, and SRBI issuance, to support IDR."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)