Bank Indonesia seen holding rates steady as market turmoil tests rupiah

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Indonesia seen holding rates steady

Highlights

A Reuters poll shows a narrow majority of economists expect Bank Indonesia to keep its benchmark 7-day reverse repurchase rate at 5.75% on Wednesday.
The rupiah is down about 8% year-to-date and Jakarta's benchmark stock index fell 11.6% on Friday after MSCI said it may downgrade Indonesia’s market status.
Fifteen of 22 economists expect Bank Indonesia's key rate to rise to 6.00% or higher before year-end as higher oil prices and a hawkish U.S. Federal Reserve pressure the rupiah.

Poll outlook before Wednesday decision

As reported by Reuters, a narrow majority of economists in its Oct. 13-19 poll expect Bank Indonesia to leave its benchmark 7-day reverse repurchase rate at 5.75% on Wednesday. The same group also expects the central bank to keep its overnight deposit rate at 4.75% and its lending facility rate at 6.50%.

Fifteen of 29 economists surveyed expect no change, even after some analysts revised their calls following Friday's market shock. Citibank, which had expected rates to stay unchanged, now forecasts a pre-emptive 50-basis-point increase on Oct. 21.

Inflation data is giving policymakers room to wait. Headline inflation stands at 3.28% in September, within Bank Indonesia's 1.5% to 3.5% target range, while core inflation eases to 2.84%.

Rupiah pressure and year-end risks

The rupiah, down about 8% so far this year, weakens further after MSCI says it is considering moving Indonesia from emerging markets status to standalone status. Jakarta's benchmark stock index also falls 5% in early Monday trading after tumbling 11.6% on Friday, its steepest one-day drop since January 1998.

Miguel Chanco, chief emerging Asia economist at UK-based Pantheon Macroeconomics, says it is too early to conclude the MSCI move will alter monetary policy, although it complicates the outlook. He says underlying fundamentals still do not point to a necessary rate hike, particularly after Bank Indonesia has already raised rates by 100 basis points earlier this year.

Some economists say the central bank can continue using non-rate tools to support the currency, including cheaper foreign-exchange hedging, encouraging use of currencies other than the U.S. dollar and deploying part of its $146.3 billion in FX reserves. Still, 15 of 22 economists expect the key rate to rise to 6.00% or higher before year-end, reflecting concern that higher oil prices and a hawkish U.S. Federal Reserve will keep pressure on the rupiah.

Beyond this year, economists do not have a clear consensus on borrowing costs. The median forecast shows the policy rate holding at 6.00% throughout 2027, while OCBC Bank economist Lavanya Venkateswaran says Bank Indonesia's priority remains stability for the Indonesian rupiah and brings forward her expected December rate hike to Wednesday.

Our earlier article on the Reserve Bank of India’s rupee defence detailed how the RBI deployed an estimated $75–$80 billion via spot dollar sales and FX swaps after introducing special measures in June, contributing to a decline in reserves. We also noted that higher oil prices, rising U.S. yields and foreign outflows were intensifying pressure on the rupee, pushing the central bank to use additional tools to curb dollar demand and limit volatility.

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