The Rupiah is Projected to Strengthen Due to the Fed's Signal of Cutting Interest Rates

Rupiah illustration (Photo: dock. Antara)

JAKARTA - The Rupiah exchange rate on Friday 15 December 2023 is expected to strengthen again after the United States Central Bank Federal Reserve (The Fed) signaled it would cut interest rates at least three times next year to 4.6 percent.

Quoting Bloomberg, on the Rupiah exchange rate on Thursday 14 December, the spot rupiah exchange rate strengthened 1.03 percent to IDR 15,502 per US dollar. Meanwhile, the Jisdor rupiah exchange rate closed up 0.87 percent to a price level of IDR 15,493 per US dollar.

Director of PT.Laba Forexindo Berjangka Ibrahim Assuaibi said that the Fed said that interest rates had now peaked at 5.4 percent, and the central bank would reduce interest rates at least three times in 2024 to 4.6 percent.

Fed Chair Powell said although it was too early to declare victory on inflation, he still projected the prospect of lower inflation in 2023.

"The Fed's dovish signal has triggered increased speculation about when the bank will start lowering its interest rates," he explained in his official statement Friday, December 15.

Ibrahim said that in the futures market, traders are estimating a more than 70 percent chance that the Fed will cut interest rates by 25 basis points in March 2024. Traders are also considering a 67 percent chance of another 25 basis point cut in May.

"However, uncertainty regarding interest rate cuts is likely to reduce optimism in the coming months, especially because the strength of the US economy can still trigger increased inflation. Recent data shows consumer price index inflation remained stable in November, while the labor market also remained strong," he explained .

After weak inflation data earlier this week, readings on Wednesday showed persistent weakness in lending activity and local liquidity levels.

The data prompted more calls for stimulus measures from Beijing, although the government remained conservative in providing more fiscal support.

Domestically, the Asian Development Bank (ADB) raised its economic growth projection in the December 2023 Asian Development Outlook (ADO) for developing countries in Asia and the Pacific to 4.9 percent for this year from an estimate of 4.7 percent in September 2023.

The increase in economic growth was caused by strong domestic demand driving higher-than-expected growth in the People's Republic of China (PRC) and India. Developing countries in Asia continue to grow rapidly, even though global conditions are full of challenges.

Apart from that, inflation in developing Asia-Pacific countries is also gradually coming under control. However, risks still exist, from rising global interest rates to climate risks such as El Nino.

For this reason, governments in Asia and the Pacific need to remain vigilant to ensure that the domestic economy remains resilient with sustainable economic growth.

The ADB estimates China's economy will grow by 5.2 percent this year, up from its previous prediction of 4.9 percent, after household consumption and public investment drove growth in the third quarter.

Ibrahim explained that while for Indonesia, the ADB maintains its projected economic growth this year at 5 percent, with inflation estimates also maintained at 3.6 percent.

In terms of inflation, the inflation outlook for developing countries in the Asia-Pacific for this year has been lowered to 3.5 percent from the previous projection of 3.6 percent.

For next year, inflation is expected to increase to 3.6 percent compared to the previous estimate of 3.5 percent.

Ibrahim estimates that the rupiah will fluctuate but close higher in trading Friday, December 15 in the price range of IDR 15,470-IDR 15,710 per US dollar.