Bank Indonesia’s unexpected rate hike last month over widening deficits in current account as well as capital flows volatility has contributed to ppreciation of Rupiah in the last six weeks. Subdued inflation despite exchange rate volatility can be explained mostly by the lower demand for consumption due to lower commodity prices, higher interest rate, and government insistence to maintain retail price of the subsidized fuel. On the external factor, we see that flattening yield curve of US Treasuries adds uncertainty to the global market. Nevertheless, except for the worse than expected trade balance data in November, most of the push and pull factors for capital inflow are working in favour of Rupiah for the next several months. Currently, by the year-to-date depreciation rate, among the emerging economies, Rupiah is among the least affected currencies by the global shocks. We view that Bank of Indonesia does not need to hike its policy rates this month.

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