Indonesian Rupiah: Softer inflation but currency risks linger – MUFG

MUFG strategists note Indonesia’s October Consumer Price Index (CPI) and core inflation both surprised on the downside, giving Bank Indonesia (BI) limited inflation-based justification to tighten policy. Nevertheless, the Indonesian Rupiah (IDR) remains weak above USD/IDR 18,000 and bond yields have risen, leading them to stay cautious and warn that a BI rate hike cannot be ruled out if currency pressures intensify.

Bank Indonesia constrained by weak Rupiah

"Indonesia's October CPI came in softer than expected, with headline inflation easing to 3.23%yoy from September's 3.28%yoy print and core inflation slowing to 2.56%yoy from 2.84%yoy, giving Bank Indonesia little inflation-driven reason to tighten, though IDR weakness remains a binding constraint."

"USD/IDR held above 18,000, while the 10-year Indonesian bond yield rose to 7.7%. Thursday's Q3 GDP release and Friday's FX reserves data will be key ahead of BI's 18 November policy meeting."

"We remain cautious on IDR, and a BI hike cannot be ruled out in the next policy meeting should currency pressures intensify."