Indonesia Holds Key Rate to Bolster Falling Rupiah Currency

Indonesia's central bank, Bank Indonesia (BI), has decided to maintain its key interest rate at 6.25% in August 2024, following a 25 basis points (bps) cut in September. This move aims to stabilize the Rupiah currency and support economic growth while keeping inflation within the target range of 2.5 ± 1%. The decision comes amidst concerns about the depreciating Rupiah and potential inflationary pressures.

The Rupiah has been under pressure in recent months, depreciating against the US dollar. In August 2024, the USDIDR exchange rate stood at 15,081.80, reflecting a 0.64% decrease from the previous trading session. This depreciation has implications for Indonesia's trade balance and export competitiveness. A weaker Rupiah makes Indonesian exports cheaper for foreign buyers, enhancing their competitiveness in global markets. However, it also increases import costs, potentially driving up inflation.

Bank Indonesia's decision to hold the interest rate at 6.25% in August 2024 is a strategic move to bolster the falling Rupiah currency. The central bank aims to maintain stability and support economic growth. However, potential inflationary pressures could challenge this policy. The latest data shows Indonesia's headline inflation rate edged down to 2.12% in August 2024, within the target range of 2.5 ± 1%. However, the Bank of Indonesia Governor, Perry Warjiyo, acknowledged forecasts of low inflation, a stable Rupiah, and economic growth needing a push higher. This suggests that while inflation is currently under control, there are concerns about future inflationary pressures.



If inflation picks up, Bank Indonesia may need to reconsider its monetary policy stance, potentially leading to an interest rate hike to rein in inflation. This could have implications for the Rupiah currency, as higher interest rates may attract foreign capital, strengthening the Rupiah. However, it could also slow down economic growth by increasing borrowing costs for businesses and households. Therefore, Bank Indonesia must carefully balance its monetary policy to maintain stability and support growth while managing potential inflationary pressures.

The Rupiah's depreciation can also impact foreign investment and capital inflows into Indonesia. A weaker Rupiah makes Indonesian assets cheaper for foreign investors, potentially attracting more foreign capital. However, a rapid depreciation can also increase inflation and borrowing costs, making it crucial for Bank Indonesia to maintain a balance between exchange rate stability and inflation control.

In conclusion, Indonesia's decision to hold its key interest rate at 6.25% in August 2024 is a strategic move to bolster the falling Rupiah currency and maintain inflation within the target range. However, potential inflationary pressures and the impact on foreign investment and capital inflows require careful consideration. Bank Indonesia must balance its monetary policy to maintain stability and support growth while managing potential inflationary pressures.