Indonesia's central bank raised its benchmark interest rate by 25 basis points to 5.50% on the 9th, while announcing a series of monetary policy adjustments and market operation plans, with a core focus on strengthening the stability of the Indonesian Rupiah and maintaining medium-term inflation targets.
This policy package encompasses multiple dimensions, including the benchmark rate increase, adjustments to the interest rate structure of monetary market instruments, enhanced foreign exchange market intervention, and a deepening of fiscal and monetary policy coordination mechanisms.
The central bank explicitly stated that this rate hike is a further step to reinforce the stability of the Rupiah and also a forward-looking preventive measure aimed at ensuring inflation remains within the established target range through 2027. To align with the benchmark rate increase, the bank will simultaneously raise the interest rate structure of its reverse repo instruments to maintain the effectiveness of monetary policy transmission.
To attract external capital, the central bank proposed enhancing the yield on government bond assets through market mechanisms, thereby increasing the appeal of domestic assets to foreign investors. Concurrently, the bank plans to make hedging swap instruments more attractive to foreign investors, providing more comprehensive risk management tools for cross-border capital flows.
The central bank emphasized that the core objective of the aforementioned policy design is to raise asset yields, thereby guiding foreign capital inflows.
Addressing short-term volatility in the currency market, the central bank announced it will intensify monetary operations in both the Rupiah and foreign currency markets to reinforce exchange rate stability. The bank stated it will continue to maintain close coordination with fiscal authorities to jointly support the Rupiah's performance.
The central bank specifically mentioned the fiscal-monetary policy coordination mechanism established with the Ministry of Finance. It noted that this mechanism aims to support the two institutions in operating independently within their respective statutory mandates, rather than blurring policy boundaries. Furthermore, the related transactional arrangements also include plans to enhance the yields of the Reserve Bank of India and government bond assets through market-based means, reflecting a policy approach that pursues regional financial cooperation alongside domestic market development.
The policy "combination punch" delivered by the central bank this time includes adjustments to price-based tools like interest rates, involves market operations as a quantitative tool, and simultaneously addresses the dual objectives of domestic inflation management and external exchange rate stability. The central bank's data released on Monday showed the country's foreign exchange reserves fell by $1.3 billion in May to $144.9 billion, not only hitting a near two-year low but also marking the longest streak of five consecutive monthly declines since 2018. Against the backdrop of persistently depleting reserves, the Rupiah's exchange rate against the US dollar hit a historic intraday low of 18,210.30.
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