Bank Indonesia is facing growing pressure to raise interest rates as the rupiah slides past 18,000 per dollar, with economists increasingly divided over how aggressively the central bank needs to act following MSCI’s shock warning on the country’s market status.
Economists at Citigroup, HSBC and Bloomberg Economics have shifted their forecasts toward tighter policy after MSCI’s downgrade threat triggered Indonesia’s worst stock selloff in nearly three decades, a selloff that has since spread from equities into bonds and the currency.
Of 38 economists surveyed ahead of the central bank’s October 20-21 rate decision, 19 now expect a hike, split between seventeen forecasting a standard quarter-point move and two calling for a more aggressive half-point increase. Citigroup is among those expecting the larger move, projecting a jump to 6.25%, while Capital Economics and others see a smaller rise to 6%.
The decision poses a fresh test for Governor Destry Damayanti, who has generally preferred currency intervention, hedging incentives and other targeted tools over blunt rate hikes that would weigh on borrowing costs across Southeast Asia's largest economy.
MSCI's warning that it may reclassify Indonesia as a standalone market, a more severe step than the frontier-market downgrade many had anticipated, has forced policymakers to weigh currency stability against growth considerations in a way last week's calmer market conditions did not require.
With the rupiah's slide testing a key psychological threshold and the rate decision only hours away, markets are likely to react sharply depending on whether Bank Indonesia opts for a larger defensive hike or sticks with the smaller, more growth-friendly move some policymakers have favored.
