The Indonesian rupiah strengthened to around IDR 17,890 per U.S. dollar on Thursday, extending its advance for a third consecutive session as the U.S. dollar continued to weaken amid expectations that the Federal Reserve will leave interest rates unchanged next week following softer U.S. economic data.
Domestically, Bank Indonesia surprised markets by holding its benchmark interest rate at 5.75%, after a total of 100 basis points in hikes in May and June, and instead unveiled measures aimed at supporting the rupiah. These include cheaper foreign-exchange hedging facilities and efforts to expand the use of local currencies in trade. Governor Perry Warjiyo said the strategy is designed to attract more foreign capital inflows and stabilise the rupiah without increasing borrowing costs.
At the same time, the government signalled possible reductions in defence spending to strengthen fiscal sustainability. However, further gains in the rupiah were limited by worries over rising global oil prices, which could stoke inflation in Indonesia, a net oil importer. Bank Indonesia also cautioned that El Niño could add upward pressure on food prices, after annual inflation quickened to 3.34% in June.
