Increased Weakness in Rupiah and Potential for Higher Inflation Puts Bank Indonesia’s mid-November Policy Meeting in Focus

As of November 2022, of Bank Indonesia’s two mandates—price and foreign exchange stability[1]—its efforts to curtail inflation seem to be more fruitful, although the Philippines’ October inflation reading should serve as a warning that inflation has yet to be tamed.  The bank’s efforts to stabilise the rupiah, however, appear less effective. The currency in September and October faced greater average declines than it did in the previous eight months, and the currency will remain under pressure as the US Federal Reserve (Fed) continues to hike rates.  

  • Indonesia on Tuesday reported October headline inflation to be 5.71% year-over-year—a Reuters poll forecasted a rate of 5.99%—which is a decline from the reading of 5.95% in September; moreover, it decelerated 0.11% month-on-month.  Core inflation increased to 3.31% in October from 3.21% year-over-year in September—lower than a Reuter’s estimate of 3.40%—but its rate of acceleration slowed for the second consecutive month.[2],[3]
  • Through October, the rupiah against the US dollar is down 8.6%, and since September it has declined 4.9%; the rupiah’s 4.9% decline since September coincides with only a 2.6% increase in the US Dollar Index (DXY), which suggests Indonesia-specific factors are weighing on the rupiah’s strength.  Against a trade-weighted currency basket,[4] the rupiah through October is up 3.9%, but since September it is down nearly 1.0%.

Average Monthly Percentage Change Against USD and Trade-Weighted Currency Basket, January-August and September-October[5]

  • The Fed on Wednesday hiked rates 75 basis points and signaled its commitment to additional increases.[6]Regionally, Bangko Sentral ng Pilipinas Governor Felipe Medalla on Thursday stated the bank intends to raise rates 75 points at its meeting on 17 November;[7] also on Thursday, Bank Negara Malaysia at its scheduled meeting increased its policy rate 25 points,[8] which may be insufficient to fasten the fall in its currency.  

Bank Indonesia primarily employs a combination of interest rate increases, bond market interventions, and selling of US dollars from its foreign reserves to stabilise the rupiah.  Of these mechanisms, interest rate hikes also have the most direct impact on inflation.

  • The bank at its meeting in October highlighted the need to strengthen the rupiah as part of its rationale for hiking interest rates[9]—increasing its policy rate should strengthen the rupiah because higher yields attract foreign capital, and it should reduce inflation because it will provide a headwind to the economy.  Indonesia has increased its policy rate 125 basis points this year—100 of those points came in September and October—and at 4.75% it currently has the highest policy rate among Malaysia, the Philippines, and Thailand.[10],[11]  

Policy Rates and Inflation[12]

  • In August, Bank Indonesia announced its bond market intervention strategy to sell short-term notes and buy medium- and long-term bonds in an attempt to shore-up the rupiah;[13] this should generate higher yields for shorter-term maturities, which should attract foreign inflows and strengthen the rupiah, and lower yields for longer-term bonds, which reduces borrowing costs for the government.  Over September and October, the change in yields across the curve generally reflect the intended effect of these operations, although the change in yields were more obvious in September than October,[14] which may reflect the bank’s effort to balance its interventions across the months.

Bond Market Interventions, Change in Yields by Maturity in September and October 2022[15]

  • Indonesia also sells dollars from its foreign reserves to purchase rupiah,[16] which theoretically generates greater demand for rupiah and strengthens the currency.  Its reserves have fallen to US$130.8 billion at end-September 2022 from US$144.9 billion at end-December 2021, or a decline of 9.7%;[17],[18] at the end of September, its reserve balance was sufficient to finance 5.9 months of imports[19] and twice its remaining short-term, external debt.[20],[21]

Bank Indonesia at its meeting in mid-November could continue to hike rates to help stabilise the rupiah and maintain downward pressure on inflation.  

  • Bank Indonesia’s rate increases and bond market interventions have not reversed the negative spread of Indonesia’s short-term bonds relative to other Southeast Asian countries and the US.  Short-term notes in the Philippines, Singapore, and US offer greater yields as of end-October—suggesting these countries may receive foreign inflows at the expense of Indonesia—and this spread has widened since September; given the Fed’s plan to continue hikes and the BSP’s announcement to raise rates 75 points at its meeting in mid-November, the spread could expand even further. 

Bond Spreads Across Yield Curve (in basis points)[22],[23]

End-October 2022 Spreads (positive indicates Indonesian bond offers higher yield)
Country Pair1 Month3 Month6 Month1 Year5 Year10 Year15 Year
Indonesia – Malaysia 0.740 2.5683.0153.2002.915
Indonesia – Philippines-1.013-0.847-0.7930.3630.4830.145 
Indonesia – Thailand   3.9944.3914.3853.791
Indonesia – Vietnam   0.5622.1452.3672.259
Indonesia – Singapore-1.045-0.571-0.0041.8913.9074.1234.132
Indonesia – USA-0.945-0.756-0.7330.8802.9373.512 
Change in spread, End-August to End-October 2022 (positive indicates Indonesian bond has widening spread)
Country Pair1 Month3 Month6 Month1 Year5 Year10 Year15 Year
Indonesia – Malaysia 0.800 1.1080.1210.0720.070
Indonesia – Philippines-0.321-0.944-1.462-0.263-0.480-0.669 
Indonesia – Thailand   0.814-0.193-0.279-0.235
Indonesia – Vietnam   -1.153-1.252-1.095-1.049
Indonesia – Singapore-0.666-0.130-0.9760.3290.2100.0220.081
Indonesia – USA-0.671-0.225-1.268-0.108-0.405-0.450 
  • Indonesia reports its third quarter GDP growth rate on 7 November, and the Finance Ministry estimates it will reach 5.7%, which exceeds the growth rate in the first and second quarter.[24],[25]  This reading may influence the bank’s appetite for hikes—a strong reading could suggest the economy can stomach further hikes or, even, requires a rate increase to slow the economy to slow inflation; whereas, a weaker-than-expected reading might give the bank pause.

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[1] Bank Indonesia.  “Monetary Policy Objectives.”  Accessed 4 November 2022.

[2] Reuters.  “Indonesia inflation eases in Oct, still above target.”  1 November 2022.

[3] Statistics Indonesia.  “The year-on-year (y-on-y) inflation in October 2022 was 5.71 percent.  The highest inflation saw in Tanjung Selor at 9.11 percent.”  1 November 2022.

[4] Basket consists of top ten trade partners.

[5] Malacca Research analysis.  We do not maintain a trade-weighted currency basket for the Singapore dollar.

[6] Wall Street Journal.  “Federal Reserve Hikes by 0.75 Point, Signals Slower Increases but Ultimately Higher Rates.”  2 November 2022.

[7] Reuters.  “Philippine to match Fed’s 75 bps rate hike on Nov. 17.”  3 November 2022.

[8] Bank Negara Malaysia.  “Monetary Policy Statement.”  3 November 2022.

[9] Bank Indonesia.  ““BI 7-day Reverse Repo Rate Raised 50bps to 4.75%: Synergy Maintaining Stability and Recovery Momentum.”  20 October 2022.

[10] Bank Indonesia.  “BI 7-day Reverse Repo Rate Raised 50bps to 4.25%: Synergy Maintaining Stability and Recovery Momentum.”  22 September 2022.

[11] Bank Indonesia.  “BI 7-day Reverse Repo Rate Raised 50bps to 4.75%: Synergy Maintaining Stability and Recovery Momentum.”  20 October 2022.

[12] Indonesia’s CPI reflects October inflation.  Inflation for the Philippines, Malaysia, and Thailand reflects September inflation; October inflation for the Philippines will be reported on 4 November, with Bangko Sentral ng Pilipinas expecting inflation to be in the range of 7.1-7.9%.

[13] Bloomberg.  “Indonesia Debuts Operation Twist to Lure Funds, Guard Rupiah.”  24 August 2022.

[14] Malacca Research analysis of bond yields provided by World Government Bonds.

[15] World Government Bonds.  Accessed 2 November 2022.

[16] Bank Indonesia.  “Official Reserve Assets September 2022 Remained High.”  7 October 2022.

[17] Bank Indonesia.  “Official Reserve Assets December 2021 Remained High.”  7 January 2022.

[18] Bank Indonesia.  “Official Reserve Assets September 2022 Remained High.”  7 October 2022.

[19] Bank Indonesia.  “Official Reserve Assets September 2022 Remained High.”  7 October 2022.

[20] Malacca Research analysis.  Total remaining short-term, external debt was $66.67 billion as of June 2022.

[21] The benchmark for adequate reserves to imports is 3.0x and adequate reserves to short-term, external debt for next 12 months is 1.0x.

[22] World Government Bonds.  Accessed 2 November 2022.

[23] Blank cells indicate one of the country pairs does not offer a bond at the respective maturity. 

[24] Reuters.  “Indonesia finance ministry sees Q3 GDP growth at 5.7%.”  28 October 2022.

[25] Bank Indonesia.  “SDDS / Real Sector / GDP at Constant Prices.”

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