At an annual rate of 6.5%, Indonesia's inflation is causing rising concern among policymakers. This could represent a crucial juncture for the Southeast Asian nation, whose currency, the Indonesian rupiah (IDR), depreciated by nearly 12% against the US dollar over the course of last year. Bank Indonesia may prefer to avoid further aggressive tightening of monetary policy, given that a cooling of domestic demand is already underway. Many Indonesian corporations hold significant debts denominated in foreign currencies. Consequently, Bank Indonesia intervenes actively in foreign exchange markets to prevent 'excessive volatility or depreciation of the Indonesian rupiah' to protect financial stability and restore the confidence of international portfolio investors.
Consumer price inflation fell to 0.4% last month, compared to 0.9% in the preceding month. The rupiah has since stabilized, appreciating by 4% after Bank Indonesia raised its benchmark interest rate by 1.5 percentage points. However, the government remains keen on lower borrowing costs to bolster domestic investment and consumption. Financial analysts suggest that further rate hikes would be counterproductive, as the broader economy is already experiencing a notable slowdown.
Over the medium to long term, Indonesia's GDP growth is expected to remain robust compared to peers like Thailand and Malaysia. Supported by a young demographic and expanding digital economy, Indonesia is projected to grow by an annual average of 4.8% over the next decade. By comparison, Thailand is expected to grow by 2.5% and Malaysia by 3.8%. Nonetheless, this growth path remains vulnerable to external shocks, particularly if global financial conditions tighten abruptly.
Question
Explain how Bank Indonesia (the central bank) intervenes in the foreign exchange market to prevent 'excessive volatility or depreciation of the Indonesian rupiah' (Extract A).
