The strong economic growth in the United States and the deteriorating condition of Indonesia's trade balance in April prompted a sell-off in the Rupiah, which caused the USD/IDR exchange rate to depreciate by 1,80% in the last month. Negative sentiment towards the Rupiah exchange rate created pressure for Bank Indonesia to increase the 7-day Reverse Repo Rate benchmark interest rate, especially from players in the foreign exchange market and banking. We view that Rupiah assets are currently too cheap and global investors will start buying Rupiah assets again. On the other hand, real sector indicators, especially inflation and domestic consumption, show that the domestic economy is still not ready to face an increase in the benchmark interest rate. The decision to increase the benchmark interest rate could slow credit growth and hamper the achievement of inflation targets and domestic growth. In our view, currently Bank Indonesia needs to maintain its benchmark interest rate at least until June 2018 after the second increase in the Fed funds rate this year in June. Apart from that, we also believe that BI needs to increase efforts to stabilize the Rupiah exchange rate through intervention in the foreign exchange market.

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