The 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 the face of rapid depreciation might be explained by higher interest rates, which slow down the demand for durable goods consumption, and the government's insistence to hold retail fuel prices despite higher international crude oil prices. On the 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 rates on Tuesday may be the best course of action.

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