Indonesia's plunging rupiah twists the policy plot
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The Indonesian rupiah has plunged to a four-year low against the dollar, complicating monetary policy for Bank Indonesia. The currency's decline may force the central bank to raise rates as early as next week. Bank Indonesia has been using various intervention tools to stabilize the rupiah, but a rate hike may be necessary to support the currency. The rupiah's high yields have historically attracted investors, but its appeal has waned due to currency volatility and narrow spreads. Foreigners now hold just 14% of Indonesian government securities, compared to 25% in December 2020. Bank Indonesia has spent $6 billion in the first quarter to support the rupiah. However, the central bank may be running out of options as expectations for Fed rate cuts recede. Some investors are betting on eventual Fed rate cuts later this year to provide relief for the rupiah. Bank of America's economist has pushed out expectations for Bank Indonesia's first rate cut to December from June. The central bank may surprise the market with a rate hike to address inflation risks from imported inflation and energy.



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