USD/IDR loses ground for the second consecutive day, trading around 18,040 during Asian hours on Tuesday. The Indonesian Rupiah (IDR) receives support as Bank Indonesia (BI) intensifies stabilization efforts under President Prabowo Subianto's directive.
President Prabowo held high-level talks on Monday with top economic officials, including the central bank governor, the finance minister, and the head of the Financial Services Authority (OJK). Following the meeting, OJK Chief Friderica Widyasari Dewi affirmed that the regulator will continue driving capital market reforms forward, with a primary focus on improving market transparency, boosting liquidity, and strictly enforcing laws against regulatory violations.
BI Governor Destry Damayanti noted that swap instruments and domestic non-deliverable forwards (DNDFs) have successfully attracted around $8 to $8.5 billion in foreign inflows to date. Concerns over MSCI’s potential reclassification of Indonesia to standalone market status next year have also eased after regulators proposed excluding stocks with highly concentrated ownership from major benchmarks to enhance price discovery.
Adding to the JPY's momentum, Jakarta's benchmark index (JKSE) rebounded 3% on Tuesday. This rally followed a hit to a six-year low the previous day, capping a severe 14.8% plunge over recent trading sessions that temporarily made it the world's worst-performing stock market this year. Indonesian equities turned upward after Jakarta authorities introduced targeted measures to restrict selling following a record two-day $82 billion rout, which had been triggered by MSCI's warning regarding potential index removal.
The USD/IDR pair loses ground as the US Dollar (USD) weakens under growing market expectations that the Federal Reserve (Fed) will leave interest rates unchanged. Fed Chair Kevin Warsh expressed optimism last week regarding the resilience of the US economy, though he refrained from offering specific guidance on the timing or likelihood of future rate adjustments.
According to the CME FedWatch tool, Fed funds futures traders expect the central bank to maintain current rates at its October policy meeting, while pricing in a 93.5% probability of a rate hike in December.
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.