Indonesian Rupiah declines as BI decides to keep benchmark rate unchanged

USD/IDR gains support as the Indonesian Rupiah struggles following Bank Indonesia's rate decision.
BI decided to hold its benchmark rate at 5.75%, against expectations of increasing it to 6.0%.
FedWatch Tool suggests that markets price in an 83.9% chance of a rate pause next week.

USD/IDR extends its gains for the third successive day, trading around 18,040 during European hours on Wednesday. The pair appreciates as the Indonesian Rupiah (IDR) faces challenges after Bank Indonesia (BI) decided to keep its benchmark rate unchanged at 5.75% for a fourth straight policy meeting, defying market expectations for a rate hike to 6.0%. The central bank hiked its overnight deposit rate by 25 bps to 5.00% and kept the lending facility rates unchanged at 6.50%.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

The USD/IDR pair appreciates as the US Dollar (USD) receives support from safe-haven demand amid rising oil prices heighten global inflation concerns. Oil prices rise as traders carefully evaluate mixed signals regarding diplomatic engagements between the United States (US) and Iran. Although negotiations remain active, market sentiment faced headwinds following high-level meetings in Tehran, where Pakistan’s army chief, Field Marshal Asim Munir, met with senior Iranian diplomatic and military leaders to discuss bilateral ties and the status of talks with Washington. A diplomat involved in the discussions clarified that while conflict resolution efforts are ongoing, reports of an imminent final agreement are premature.

Financial markets are closely gauging the Federal Reserve's (Fed) next moves. According to the CME FedWatch Tool, traders currently price in an 83.9% probability that the Fed will keep interest rates on hold next week, alongside a 90% chance of a rate hike in December. However, Fed Chair Kevin Warsh maintained a neutral stance, emphasizing that he does not "prejudge" interest rate decisions and leaving markets without a definitive signal on whether the central bank will raise or hold rates steady at its upcoming October policy meeting.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.