BI's Interest Rate Hike Successfully Dampens Rupiah Volatility

Based on Bloomberg data, the Indonesian Rupiah exchange rate on Tuesday (June 5th) was traded at Rp 13,883 per US dollar as of 12:40 WIB. This means the Rupiah strengthened by Rp 326 (2.29%) from its weakest point this year at Rp 14,209/US dollar. The increase in Bank Indonesia's (BI) benchmark interest rate to 4.75% temporarily managed to curb the Rupiah's volatility, which had previously weakened to over Rp 14,000/US dollar.

Uncertainty in the global financial market, along with the potential for the US Federal Reserve (The Fed) to raise interest rates up to three times by the end of the year, fueled the US dollar's strengthening against major world currencies. As a result, the Rupiah and other regional currencies weakened against the US dollar. The improvement in the US economy led The Fed to raise its benchmark interest rate to curb inflation.

The possibility of The Fed raising interest rates also led the market to demand an increase in the Rupiah interest rate, which had previously fallen to its lowest level at 4.25%. Bank Indonesia responded to this market demand by raising the BI 7-day Reserve Repo Rate twice during the Board of Governors' meeting in May 2018, each by 25 basis points. However, raising interest rates can impact economic growth in the medium to long term. As is known, in recent years, the national economy has grown stagnantly at around 5%.