Commerzbank’s Charlie Lay reports that Bank Indonesia delivered a surprise off-cycle 25 bp hike to 5.50%, reinforcing its focus on Rupiah stability through higher rates and FX intervention. He cautions that structural concerns over policy, ratings outlook and reserves mean the package may only offer temporary support, and further tightening is possible if USD/IDR depreciation persists.

Policy mix may not secure lasting support

"Bank Indonesia (BI) unexpectedly hiked the policy rate by 25bp to 5.50% in an off-cycle meeting yesterday, following the larger-than-expected 50bp increase delivered on 20 May."

"The move underscores BI's determination to stabilise the Indonesian rupiah (IDR) amid heightened market volatility and deteriorating investor sentiment."

"While the package could provide some near-term support for IDR, it may not be sufficient to engineer a sustained recovery."

"Meanwhile, BI's capacity to defend the currency has been eroded by declining foreign exchange reserves, which fell to a 23-month low of USD145bn in May, which is around 5.6 months of import cover."

"As a result, further tightening cannot be ruled out should depreciation pressures persist."

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