Bank Indonesia likely to hike key interest rate by 25 bps in September

Bank Indonesia is set to meet this week for its monetary policy decision, a day after the U.S. Fed meeting. According to a DBS Bank research report, the Fed is likely to hike its rate by 25 basis points, which might further narrow the gap between the U.S.-Indonesia’s policy rates. Bank Indonesia’s response is expected to be a close call, with much hinging on the stability of Indonesian rupiah. The recent USD correction has helped in stabilizing the rupiah in the 14800 handle, alleviating the urgency for an imminent rate hike.

Nevertheless, given the view that USD bears are underestimating the risks from China-US trade tensions, and overly optimistic on Brexit and Italy, the dollar is likely to bounce and ply pressure on the local unit, along with other EM currencies.

“This being the case, we see a slightly higher probability of a pre-emptive 25bp hike this week”, added DBS Bank.