Indonesian Rupiah weakens amid complicating BI policy outlook

• BI holds rates at 5.75% as oil prices and El Niño complicate inflation management.
• The US Dollar stays strong following a 25 bps Fed rate hike to 3.75%-4.00%.
• Markets price in a 49.8% chance of another Fed rate increase at the October meeting.

USD/IDR depreciates after opening with a bullish gap, remaining in positive territory for the sixth straight day and trading around 17,780 during Asian hours on Thursday. Meanwhile, traders are bracing for Bank Indonesia’s (BI) policy meeting next week. Indonesian policymakers previously kept their key rate unchanged at 5.75% for a second straight month in August, following a cumulative tightening of 100 basis points since May.

Inflation risks from higher oil prices and potential El Niño effects are complicating the BI policy outlook, as the central bank seeks to maintain an adequate interest-rate differential while supporting Rupiah stability and broader economic growth.

Indonesia appoints technocrat Nazara as markets eye fiscal continuity

Analysts at Commerzbank highlight that Suahasil Nazara, “widely viewed as a technocrat,” is expected to “prioritise fiscal prudence” in his new role as Indonesia’s Finance Minister. They note that Nazara brings substantial continuity to the post, having “served as deputy finance minister under Sri Mulyani from 2019” and been “closely involved in fiscal policymaking and budget management.” Commerzbank adds that his technocratic credentials are underpinned by a long career at the Finance Ministry, where he “held several senior roles,” including “head of the Fiscal Policy Agency from 2016 to 2019,” reinforcing expectations that fiscal discipline will remain a central policy focus.

The USD/IDR pair holds its ground as the US Dollar (USD) remains on a firm footing following an interest rate hike by the US Federal Reserve (Fed), alongside signals that another increase could follow before the end of the year.

The US central bank raised the federal funds rate by 25 basis points to a target range of 3.75% to 4.00%. Matching market expectations, this move represents the Fed's first interest rate increase in three years. Money markets have priced in roughly a 49.8% probability of another Fed rate hike at the October meeting, according to the CME FedWatch tool.

Fed hike underscores commitment to prolonged restrictive stance

Economists at NBC note that, in the wake of last week’s strong CPI print, “there was little doubt about this one.” They point out that while “a hike today was widely expected,” the move “doesn’t appear to be a meek or reluctant rate increase (even though the Fed held out for a long time before tightening).” Instead, the upwardly revised dot plot suggests “relatively broad support for more restrictive monetary policy for a significant period of time”—with the Fed not projecting “a return to a 3.5% to 3.75% range until the end of 2029.”