COMMENT-Bank Indonesia likely to hold rates despite weak IDR

The Indonesian rupiah is trading at its weakest level versus the greenback since April 2020, prompting strong intervention from Bank Indonesia (BI). While this has spurred speculation of a rate hike to shore up the IDR, the central bank is likely to stay on hold this week.

The booming U.S. economy, Middle East tensions and higher oil prices have piled pressure on the IDR. Strong dollar demand ahead of quarter-end dividend related outflows also exacerbated the IDR sell-off since early March.

Yet BI is likely to keep its benchmark seven-day reverse repo rate unchanged at 6.0% on Wednesday as higher interest rates would cause further hardship for importers and the manufacturing sector.

The softer IDR has already raised the cost of imported raw materials and its current weakness is mostly a function of the strong U.S. dollar and U.S. policy stance.

BI will continue to stabilise the exchange rate by direct intervention in both the spot and domestic non-deliverable forward (DNDF) markets. BI has also been active in buying government bonds to keep yields from rocketing alongside a rally in U.S. Treasury yields.

Meanwhile, the government has told state-owned enterprises to refrain from huge dollar purchases, especially for imports of consumer goods.

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