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Joey Cuyegkeng, Senior Economist at ING, notes that Bank Indonesia (BI) surprised investors with a 25 basis point policy rate hike as it has resumed tightening to stabilise the rupiah, which had fallen to its weakest level since October 2015

Key Quotes

“The Indonesian rupiah (IDR) traded as weak as IDR14680 earlier this week from Friday’s IDR14400. The weakness came amid a worsening in the current account deficit, which was announced last Friday to have widened to -$8 billion or to -3% of GDP in 2Q from -$5.5 billion or -2.2% of GDP in 1Q, and from -$4.8 billion or -1.9% of GDP in 2Q 2017.”

“The currency was also hit by expectations of a steady policy rate decision at today’s meeting  as well  as the contagion effect of the slide in the Turkish Lira (TRY).”

“Today’s July trade deficit of $2 billion, the highest in five years, indicated that the current account in 3Q could widen further as imports accelerated to satisfy strong domestic demand.”

“All of this argued for BI’s resumption of its tightening cycle and today’s surprise 25 basis point rate hike after a pause in July.”

“This  combination of monetary tightening and government  measures could eventually address a couple of the drivers of IDR weakness – the weak external payments condition and strong domestic demand.”