Bank Indonesia to deliver policy rates decision as capital market reels from chaos

Indonesia's central bank, Bank Indonesia, is set to announce its decision on interest rate policy on Wednesday, amid a tumultuous capital market and the weakening rupiah. The decision comes as nearly half of the surveyed analysts, 15 out of 29, predicted the bank would maintain the current benchmark rate of 5.75 per cent, while 13 forecasted a 25 basis point hike and one expected a 50 basis point increase.

The central bank has moved up its policy rate press conference to 1330 local time, or 0630 GMT, a 30-minute earlier slot than usual, to accommodate Governor Destry Damayanti's schedule. This shift is likely a response to the recent market volatility.

The rupiah has been under pressure recently due to MSCI's warning that it may delist Indonesian equities as a standalone market, causing a significant sell-off in the market. The bourse experienced a two-day drop steeper than any in the 1998 Asian financial crisis, and the currency is currently the worst-performing emerging Asian currency, having lost over 7.0 per cent against the US dollar this year.

In May and June, the central bank raised rates by 100 basis points to defend the rupiah, which hit an all-time low in June due to investor concerns over Indonesia's economic stability. However, the bank has since maintained the rates unchanged.

Analysts and investors are concerned about the fiscal sustainability of President Prabowo Subianto's populist spending plans and expensive fuel subsidies, as well as the bank's independence. Economists at the University of Indonesia's Institute of Economic and Social Research expect the central bank to keep rates unchanged but are prepared to act if pressure on the rupiah intensifies.

They note that Bank Indonesia faces competing policy priorities, with further monetary tightening potentially helping to contain exchange rate pressures but adversely affecting domestic demand. Citi Research has revised its earlier prediction for a pause and now expects a 50 basis point hike from the central bank to preempt foreign capital market outflows from the equity market.