Indonesia's central bank unexpectedly raised interest rates on Tuesday. Faced with persistent internal and external pressures battering the local currency, the bank implemented emergency regulatory measures.
As Southeast Asia's largest economy, its policymakers increased the benchmark interest rate by 25 basis points to 5.50%. They also announced several measures to stabilize the Indonesian rupiah, including introducing incentive policies to attract foreign investment.
Additionally, the central bank raised its overnight deposit facility rate and overnight lending facility rate by 25 basis points each. The adjusted rates are now 4.50% and 6.25%, respectively.
An official from the central bank's communications department stated in a declaration that the Middle East situation has heightened market volatility. The rate hike and accompanying measures are intended to stabilize the rupiah's exchange rate and ensure inflation remains within the target band.
Following the announcement, the Indonesian rupiah strengthened, and the country's main stock index extended its gains. At the latest quote, the USD/IDR exchange rate fell 0.6% to 18,060.
The central bank stated it would increase the yields on rupiah-denominated securities of various maturities to enhance returns for foreign portfolio investments. These securities, backed by government bonds, are primarily used to manage market liquidity and smooth exchange rate fluctuations.
Simultaneously, the bank lowered hedging swap costs for foreign investors and indicated it would intensify market intervention efforts to support the rupiah's exchange rate.
This ramping up of supportive measures resembles actions taken by the Reserve Bank of India. Against a backdrop where regional currencies are generally under pressure, the Indian central bank has already employed various non-monetary tools to stabilize the rupee.
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