MACROECONOMIC ANALYSIS SERIES: BI Board of Governor Meeting, October 2018

Rupiah took a paradoxical turn within the last month, where continued rapid depreciation was also followed by second monthly deflation in a row, defying conventional wisdom.  Muted inflation in face of rapid depreciation might be explained by higher interest rate, which slows down the demand for durable goods consumption, and government’s insistence to hold retail fuel price despite higher international crude oil price.  On external side, we still see pressure on Rupiah going forward given persistent current account deficit and continued sign of monetary policy tightening around the world. Given the decrease in inflation, priced-in global shocks in the short run, and potential benefits from the implementation of the negative Tobin tax initiatives,  we argue that holding interest rate on Tuesday may be the best course of action.

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