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Indonesia
This Week in AsiaEconomics

Indonesia’s rupiah rebounds but rate rises threaten middle class

A successful sovereign wealth fund debut and a stock market rally offer a reprieve, even as higher borrowing costs threaten growth

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An Indonesian rupiah banknote pictured next to a US dollar banknote at a currency exchange office in Jakarta. Photo: AFP
Resty Woro Yuniar
Indonesia’s rupiah rallied from a historic low this week, its stock market surged and a closely watched sovereign wealth fund bond offering was oversubscribed, offering Southeast Asia’s largest economy a reprieve after months of asset pressure.
But economists have warned that the relief may come at a cost as the same forces helping stabilise the rupiah, including higher interest rates and easing external pressure, could deepen financial strain on the country’s shrinking middle class and weigh on growth.

The rupiah was trading at 17,762 to the US dollar as of Wednesday, a rebound from its historic low of 18,000 the previous week. The Indonesia Composite Index also rallied by as much as 5 per cent on Monday after market turbulence had wiped more than 32 per cent off the stock market’s value over the previous six months.

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Analysts attributed the rupiah’s recovery to Bank Indonesia’s decisive monetary response. The central bank has enacted back-to-back rate increases totalling 75 basis points in recent weeks, pushing its benchmark lending rate to 5.5 per cent – marginally above the US Federal Reserve’s current 3.5–3.75 per cent range.

The Bank Indonesia logo is seen outside the central bank’s headquarters in Jakarta. Photo: Shutterstock
The Bank Indonesia logo is seen outside the central bank’s headquarters in Jakarta. Photo: Shutterstock

“This was a fairly swift and highly unusual move compared to previous BI policies,” said Mohammad Faisal, executive director of the Centre of Reform on Economics Indonesia think tank.

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