Bank Indonesia may raise rates off-cycle

Indonesia has not ruled out the possibility of an out-of-cycle rate increase following its recent surprise rate hike, as suggested by a central bank spokesperson. Bank Indonesia’s spokesman, Erwin Haryono, acknowledged that such a move is always a possibility, even if it’s currently a small one. However, Haryono indicated that the policy response delivered during the most recent Board of Governors’ meeting is deemed sufficient for now.

These comments reflect the mounting pressure on central banks in the region to take more assertive measures to strengthen their currencies amid a stronger US dollar and rising US Treasury yields. The Philippines’ central bank, Bangko Sentral ng Pilipinas, recently implemented an unscheduled rate hike, increasing its key rate to 6.5%.

Analysts from PT Bahana Sekuritas, who correctly predicted Indonesia’s recent rate increase, now suggest that the central bank could and is likely to tighten policy further, possibly even before the next scheduled meeting on November 23. They believe that a further rate hike might be necessary, as central bank intervention to support the currency may not be sustainable in the long term.

The Indonesian rupiah has faced pressure, nearing a three-year low, with the exchange rate at 15,940 rupiah per US dollar. The 10-year government bond yield has also increased.

Despite inflation concerns, Indonesia has managed to keep price increases within target since May. In contrast, the Philippines faces the risk of missing its inflation target for a third consecutive year in 2024.

The Bank of Indonesia’s Governor, Perry Warjiyo, indicated that the October rate hike was a preemptive and front-loading move, suggesting a willingness to take further action if necessary.

Some analysts suggest that another quarter-point rate hike to 6.25% could serve as insurance for the Indonesian economy against geopolitical risks and rising political uncertainty ahead of the 2024 election, which could impact foreign inflows.

While last week’s rate hike hasn’t fully stabilised the rupiah, the Financial System Stability Committee of Indonesia is scheduled to meet on November 3 and may provide a more comprehensive response to the economic challenges.