The Net Interest Rate Differential Between Rupiah and US Dollar is Narrowing.

High inflation in the United States (US) forced the Federal Reserve (The Fed) to aggressively raise its benchmark interest rate in 2022.

Throughout the year, the US central bank has raised the US dollar interest rate five times, reaching 300 basis points (bps) to a range of 3-3.25% on September 21, 2022. In the last three months alone, the US dollar interest rate increased by 75 bps consecutively.

This condition narrowed the net interest rate differential between the Rupiah and the US dollar, as shown in the graph. This makes investments in Rupiah less attractive to foreign investors, and the Rupiah tends to weaken against the US dollar.

As an illustration, the net interest rate differential between the Rupiah and the US dollar was still 325 bps at the beginning of the year. The Rupiah interest rate was 3.5%, while the US dollar interest rate was only 0.25%. However, The Fed's aggressive move to raise its benchmark interest rate to curb inflation narrowed the net interest rate differential between the Rupiah and the dollar.

The Fed's interest rate hike on Wednesday (September 21, 2022) was immediately responded to by Bank Indonesia (BI). Bank Indonesia's Board of Governors (RDG) meeting on Thursday (September 22, 2022) decided to raise the BI-7day Reserve Repo Rate (BI7DRR) by 50 bps to 4.25%. With this increase, the net interest rate differential between the Rupiah and the US dollar is maintained within a range of 100 bps.

For information, the Rupiah exchange rate closed at 15,033 per US dollar in the Jakarta Interbank Spot Dollar Rate (JISDOR). This exchange rate weakened by Rp755 per US dollar or 5.29% compared to the end of last year (year to date/ytd).

The Rupiah's fundamentals remain strong, with an attractive interest rate of 4.25%, an inflation rate of 4.69% (yoy), economic growth of 5.23% until the first half of 2022, and foreign exchange reserves of US$132.2 billion in August 2022. This amount is sufficient to finance imports and pay off the government's foreign debt for 6 months.