Athough inflation eased in August 2022, it is still well above BI’s target range and expected to accelerate in the remaining months of 2022 following the fuel price hike. From external side, the Fed’s aggressive move on interest rate hikes, combined with external pressures, will continue to have an adverse impact on emerging markets, including Indonesia, in terms of capital outflows. As a result, Rupiah depreciated to a level of around IDR15,000 per USD in the last few days.  Therefore, we see that BI needs to increase its policy rate by 25 bps to 4.00% in order to maintain inflation expectations and curb future inflationary pressures, given the government’s decision of raising subsidized fuel prices earlier this month. In addition, as a pre-emptive measure following the Fed’s decision on their policy rates that may induce another round of flight-to-safety moves from risky global assets, we see that it is also the right momentum for BI to start preparing a more comprehensive stabilization strategy for maintaining the exchange rate.

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