Societe Generale notes Bank Indonesia’s (BI) reaction function is driven by the Indonesian Rupiah (IDR) and exchange rate stability. The report says the Rupiah faces pressure from a stronger US Dollar (USD) and hawkish Federal Reserve (Fed) pricing, with stress around USD/IDR 18,000. BI is ready to act if currency weakness becomes disorderly or threatens inflation expectations, keeping a hawkish stance.

Currency weakness keeps hike risk alive

"Also, BI still has room to manage currency depreciation pressure through non-rate instruments."

"We expect BI to maintain a hawkish policy bias, emphasising its willingness to act again if rupiah weakness becomes disorderly or begins to threaten inflation expectations."

"The rupiah remains under pressure from a stronger US dollar and more hawkish Fed pricing, with renewed stress around the USD/IDR 18,000 in early July."

"First, if the currency depreciation accelerates despite intervention, BI may need to raise rates to rebuild carry, stabilise expectations and limit portfolio outflows."

"Secondly, BI has already tightened meaningfully in a short period, and the macroeconomic trade-off is becoming more visible. Consumer confidence eased to 117.8 in June from 120.9 in May, even though it remains in optimistic territory."

"Third, a renewed rise in US yields, a more hawkish Fed, higher oil prices or a deterioration in Indonesia’s external balance could force BI to prioritise currency stability over growth."

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