Indonesia keeps hiking rates, but liquidity moves make for a complicated stance

Indonesia’s central bank hiked rates twice in the month of June, with Governor Perry Warjiyo vowing to “go all-out” to support the embattled rupiah.

But the Central Bank of Indonesia chief is simultaneously making other moves to ease stress in the financial system, meaning the monetary situation is less contractionary than it first appears.

Interbank lending rates are signaling liquidity issues. The central bank is issuing more repos, particularly to specific banks that are short of cash. Meanwhile, rising government debt issuance combined with foreign portfolio outflows had pushed Bank Indonesia into buying government bonds directly. These purchases expand the central bank’s balance sheet and inject reserves — working against system-wide liquidity absorption.