The Asian currency war continues, Indonesia unexpectedly raises interest rates, Wall Street still feels it's not enough

Under the "offensive" of a strong US dollar, the Indonesian rupiah is one of the most severely depreciating Asian currencies. Faced with the looming devaluation trend, the Indonesian central bank took emergency action by unexpectedly raising interest rates. However, Wall Street investment banks believe this is far from enough.

On April 24th, the Indonesian central bank raised interest rates by 25 basis points more than expected, bringing the benchmark interest rate to 6.25%, while the market expected 6%, marking the first rate hike of the year. Perry Warjiyo, Governor of the Indonesian central bank, stated at a press conference that the rate hike decision was a "preemptive and forward-looking measure" aimed at stabilizing the exchange rate of the Indonesian rupiah. He mentioned that all available tools will continue to be used to maintain the stability of the Indonesian rupiah.

Following the announcement of the rate hike decision, the Indonesian rupiah strengthened in the short term, with the rupiah against the US dollar increasing by 0.5%, but still at a historical low of 16,240. So far this year, the Indonesian rupiah has depreciated by over 5%.

Goldman Sachs previously pointed out that in the current situation of significant depreciation of emerging market currencies, the Indonesian central bank will actively defend the weakness of its currency. Given Indonesia's high current account deficit, high inflation rate, and high external debt levels, a significant depreciation of the local currency may pose greater risks to economic stability.

However, analysts widely question the effectiveness of the Indonesian central bank's rate hike. While the rate hike may help curb further depreciation of the Indonesian rupiah in the short term, it may not be sufficient to stimulate rupiah appreciation in the long run. On one hand, the movement of the Indonesian rupiah will still depend on the Fed's interest rate cut expectations, and on the other hand, whether the Indonesian central bank's policies can attract foreign capital inflows into Indonesia will be crucial in determining the rupiah's trend.

Jeffrey Zhang, an emerging market strategist at Bank of East Asia, believes that the Indonesian central bank will continue to maintain a hawkish stance and further optimize the Indonesian central bank's rupiah securities (SRBI) to attract foreign funds, and may even reintroduce the existing DHE policy (regarding exporters' profits) to enhance onshore foreign exchange.

Jeffrey Zhang stated that the performance of the Indonesian rupiah will mainly depend on whether the policies to be introduced by the Indonesian central bank will help reverse the recent capital outflows from Indonesia. US dollar rates are expected to remain high for a longer period.

Lavanya Venkateswaran and Ahmad A Enver, ASEAN economists at OCBC Bank, believe that a 25 basis point rate hike is not enough to stabilize the Indonesian rupiah. The global backdrop remains turbulent, and concerns about Indonesian economic growth may soon take center stage, with economic growth expected to slow down and exports performing below expectations.

Alan Lau, a strategist at Malayan Banking Berhad in Singapore, also believes that the Indonesian central bank's rate hike should provide some support for the Indonesian rupiah, but uncertainties from external events, especially those related to US data, remain key factors driving the Indonesian rupiah in the near term Whether the US dollar will break below the support level of 16,000 against the Indonesian Rupiah will also depend on the performance of US economic data.

Radhika Rao, Senior Economist at DBS Bank, stated in a report, "A slight rate hike is not a panacea for resisting the weakness of the Indonesian Rupiah."

Capital Economics predicts that if the Indonesian Rupiah continues to weaken, the Indonesian central bank may further raise interest rates. Gareth Leather, Senior Asia Economist at Capital Economics, suggested that the central bank's rate hike may signal the beginning of a long-term tightening cycle, but with policy rates at elevated levels and weak global demand weighing on the Indonesian economy, the central bank will certainly be cautious about an overly tight cycle