Brown Brothers Harriman’s (BBH) Elias Haddad notes that USD/IDR retreated sharply after hitting a fresh record high, as Bank Indonesia delivered an unscheduled 25 bps hike to 5.50%, following a surprise 50 bps move in May. Haddad expects BI’s rate hikes and FX intervention to limit further IDR weakness, though he sees the currency remaining undervalued until the energy shock subsides.

Policy tightening and undervalued rupiah

"USD/IDR pulled back sharply after reaching a fresh record high of 18190 today. Bank Indonesia (BI) lifted the policy 25bps to 5.50% today, more than a week ahead of its next scheduled meeting."

"BI said “this increase is a follow-up measure to strengthen the stabilization of the rupiah exchange rate…”[and] “a preemptive step to keep inflation in 2026 and 2027 within the government’s target range. Today’s unscheduled rate decision follows the bank’s surprised jumbo 50bps hike on May 20."

"The rupiah is -10% undervalued relative to its real effective exchange rate trend, the most since 2009."

"BI rate hikes and ongoing FX intervention will help curtail IDR weakness. But until the energy shock fades, IDR is unlikely to correct its significant undervaluation."

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