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BI's fight to defend the rupiah: Will it succeed?
BI seems to be overwhelmed by a multitude of negative factors surrounding the rupiah.
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For some time, the rupiah has been under pressure from the tightening of US monetary policy. (Antara/Puspa Perwitasari)
F
ollowing Bank Indonesia’s (BI) decision to raise its reference rate by a significant amount last month to stem the slide of the rupiah, the rupiah has not budged from its position. The rupiah strengthened against the United States dollar after BI raised its seven-day reverse repo rate by 50 basis points to 5.25 percent.
However, one week after BI’s decision, its value dropped again to Rp 14,409 against the dollar, slightly worse than the level recorded before BI raised the interest rate.
BI seems to be overwhelmed by a multitude of negative factors surrounding the rupiah, and if BI ammunition becomes less effective in defending the rupiah, it will have to resort to more market intervention — a more risky action — which would result in the accelerated depletion of its external reserves.
And BI’s actions would be more costly since its rate increase could adversely affect economic growth. With BI’s rate rise, it would be difficult for banks to expand its lending growth to support the economy.
