Indonesian Rupiah weakens amid complicating BI policy outlook
- BI holds rates at 5.75% while oil prices and El Niño complicate inflation management.
- The US Dollar stays strong following a 25 bps Fed rate hike to 3.75%-4.00%.
- Markets price in a 49.8% chance of another Fed rate increase at the October meeting.
USD/IDR depreciates after opening with a bullish gap, remaining in positive territory for the sixth straight day and trading around 17,780 during Asian hours on Thursday. Meanwhile, traders are bracing for Bank Indonesia’s (BI) policy meeting next week. Indonesian policymakers previously kept their key rate unchanged at 5.75% for a second straight month in August, following a cumulative tightening of 100 basis points since May.
Inflation risks from higher oil prices and potential El Niño effects are complicating the BI policy outlook, as the central bank seeks to maintain an adequate interest-rate differential while supporting Rupiah stability and broader economic growth.
Indonesia appoints technocrat Nazara as markets eye fiscal continuity
Analysts at Commerzbank highlight that Suahasil Nazara, “widely viewed as a technocrat,” is expected to “prioritise fiscal prudence” in his new role as Indonesia’s Finance Minister. They note that Nazara brings substantial continuity to the post, having “served as deputy finance minister under Sri Mulyani from 2019” and been “closely involved in fiscal policymaking and budget management.” Commerzbank adds that his technocratic credentials are underpinned by a long career at the Finance Ministry, where he “held several senior roles,” including “head of the Fiscal Policy Agency from 2016 to 2019,” reinforcing expectations that fiscal discipline will remain a central policy focus.
The USD/IDR pair holds its ground as the US Dollar (USD) remains on a firm footing following an interest rate hike by the US Federal Reserve (Fed), alongside signals that another increase could follow before the end of the year.
The US central bank raised the federal funds rate by 25 basis points to a target range of 3.75% to 4.00%. Matching market expectations, this move represents the Fed's first interest rate increase in three years. Money markets have priced in roughly a 49.8% probability of another Fed rate hike at the October meeting, according to the CME FedWatch tool.
Fed hike underscores commitment to prolonged restrictive stance
Economists at NBC note that, in the wake of last week’s strong CPI print, “there was little doubt about this one.” They point out that while “a hike today was widely expected,” the move “doesn’t appear to be a meek or reluctant rate increase (even though the Fed held out for a long time before tightening).” Instead, the upwardly revised dot plot suggests “relatively broad support for more restrictive monetary policy for a significant period of time”—with the Fed not projecting “a return to a 3.5% to 3.75% range until the end of 2029.”
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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