Over the past week the Indonesian rupiah has been under pressure as 10-year US treasury yields passed beyond the 3 percent level. Meanwhile, an improving US economy gives rise to expectations that the Federal Reserve will hike its key rate four times this year (instead of three times). Lastly, US dollar demand in Indonesia traditionally rises in the April-May period because of foreign debt repayments and dividend payouts, hence putting additional pressures on the rupiah.

As a result, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.10 percent from IDR 13,778 per US dollar on Thursday (19/04) to IDR 13,930 per US dollar one week later (Thursday 26/04). It has to be noted that not only the rupiah is sliding against the US dollar. Broad-based US dollar strength puts pressure on most currencies across the globe. For example, compared to the rupiah, currencies of Thailand, Malaysia, India, South Korea, and Singapore have depreciated more markedly against the greenback over the same period.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

In the press conference on Thursday (26/04) Governor Martowardojo emphasized that the fundamentals of the Indonesian economy remain strong with inflation comfortably within the central bank's target range of 2.5 - 4.5 percent (y/y), the current account deficit comfortably below 3 percent of GDP, accelerating economic growth, and firm financial system stability. This is also reflected by the recent decision of Moody's Investors Service to upgrade Indonesia's sovereign credit rating several weeks ago.

Still, the central bank will continue to carefully monitor the situation and intervene to safeguard rupiah stability. Intervention is done through the purchase of bonds and the selling of foreign currency. Earlier this week Bank Indonesia had already confirmed it used a significant amount of funds to defend the rupiah. Hence, Indonesia's foreign exchange reserves are bound to decline further. These reserves had already fallen about USD $6 billion in the February-March period, partly due to central bank intervention.

At the press conference Martowardojo also announced that Bank Indonesia would adjust its benchmark interest rate upwards (which would undermine the nation's macroeconomic growth momentum) in case pressures on the rupiah persist and have the potential to hamper the central bank's inflation target, while also disturbing the stability of the financial system. A higher benchmark interest rate would make Indonesia a more attractive investment destination due to widening rate differentials with the USA, hence avert capital outflows and attract new inflows. It has been almost 3.5 years since Bank Indonesia last raised its benchmark rate which currently stands at 4.25 percent.

Martowardojo also stated that Bank Indonesia prepared a "second line of defense", a reference to bilateral swap deals with other central banks.