Bank Indonesia prepared for potential challenges amid hawkish Fed and currency fluctuations

Indonesia’s central bank is gearing up for potential challenges ahead, with the head of its monetary management department, Edi Susianto, stating that they are prepared to provide more support for the rupiah if needed. This comes as Asian economies brace for increased currency volatility following the US Federal Reserve’s recent announcement of higher interest rates.

Susianto emphasized that while Bank Indonesia is ready to intervene in the currency market, they will not solely rely on intervention. The central bank raised rates unexpectedly last month as a preemptive move to ensure inflation remains within its target amidst worsening global risks.

Countries around the world are taking measures to protect their currencies from a strengthening dollar, with Indonesia stepping in with a “triple intervention” in the spot, non-deliverable forwards, and bond markets to support the rupiah. Japan and Vietnam have also intervened to support their currencies, while Malaysia and South Korea have expressed readiness to do the same.

Despite the challenges, Indonesia has seen net foreign inflows into government bonds and central bank bills since the rate increase. The central bank is encouraging companies to use hedging instruments and is working to deepen the market to reduce the need for intervention.

While Susianto noted that any future monetary policy action would be data-dependent, economists are divided on whether Bank Indonesia will cut rates later this year. Brian Lee from Maybank Investment Banking Group suggested that another rate increase could be on the table if the rupiah depreciates significantly.

Overall, Indonesia is taking proactive steps to navigate the uncertain economic landscape and safeguard the stability of its currency in the face of global challenges.