The Market is Waiting for the Decision to Cut the Fed's Interest Rate, Rupiah Has the Potential to Strengthen

JAKARTA - The rupiah exchange rate on Thursday, August 1, 2024, is expected to weaken against the United States (US) dollar.

Cited from Bloomberg, the rupiah exchange rate on Wednesday, July 31, 2024, the rupiah exchange rate on the spot market closed up 0.25 percent at IDR 16,260 per US dollar. Meanwhile, the rupiah exchange rate at the Jakarta Interbank Spot Dollar Rate (Jisdor) Bank Indonesia (BI) closed up 0.15 percent to IDR 16,294 per US dollar.

Director of PT Laba Forexindo Berjangka Ibrahim Assuaibi said that the central bank is widely expected to keep interest rates stable. However, the focus will be on potential signals of interest rate cuts, following several weak inflation readings and dovish comments from Fed officials.

"The general consensus largely supports a 25 basis point cut in September," he said in his statement, quoted on Thursday, August 1.

Also, Middle East tensions have been heating up following reports that Hamas chief Ismail Haniyeh has been assassinated in Iran, according to a statement from the Palestinian militant group Hamas and Iranian state media on Wednesday.

This comes a day after the Israeli government claimed to have killed a senior Hezbollah commander in an airstrike in Beirut on Tuesday in retaliation for Saturday’s cross-border rocket attacks on Israel.

Also in Asia, Ibrahim said, PMI data showed China’s manufacturing sector shrank for a third straight month in July, while non-manufacturing growth slowed. The data came after a meeting of China’s Politburo that saw the government pledge more stimulus measures, particularly those aimed at boosting consumer sentiment.

From the internal side, the S&P rating agency has again maintained Indonesia's Sovereign Credit Rating at BBB, one level above investment grade, with a stable outlook as of July 30, 2024.

S&P believes that Indonesia's economic growth prospects will remain solid with external resilience and a maintained government debt burden, supported by a credible monetary and fiscal policy framework.

In addition, S&P projects that Indonesia's average economic growth over the next three to four years will remain at around 5.0 percent. The economic growth projection is driven by strong domestic demand, as well as increasing government spending and private investment.

Meanwhile, the resilience of the external sector will remain maintained in the medium term. The performance of the external sector is supported by forecasts of increased exports in line with the implementation of downstream policies amid weakening commodity prices. S&P also appreciates the Indonesian Government's commitment to maintaining inflation that has been under control since 2010. In addition, S&P projects that inflation in 2024-2025 will be in the target range of 2.5 percent plus minus 1 percent, respectively at 2.8 percent and 3.0 percent.

In addition, the innovation of a pro-market monetary operations strategy with the use of market-based instruments is considered to further increase the flexibility of monetary policy. In the fiscal sector, S&P views the Indonesian government as remaining committed to maintaining a fiscal deficit below 3 percent of Gross Domestic Product (GDP).

In general, S&P believes the new government will pay attention to the sustainability aspect of policies to maintain credibility and avoid significant economic and financial disruption. S&P previously maintained Indonesia's Sovereign Credit Rating at BBB with a stable outlook on July 4, 2023. Ibrahim estimates that the rupiah will fluctuate but close higher on Thursday, August 1, 2024, in the price range of IDR 16,210 - IDR 16,280 per US dollar.