Indonesia has bolstered its credentials as an emerging market leader — at some potential cost. The country took a surprising step to shore up its faltering currency by raising interest rates, and foreshadowed the tough choices confronting Asian economies in the coming weeks. Officials had hoped that hikes were well behind them, but the dollar hegemon in foreign-exchange markets had other ideas.
Policymakers can attempt to tough out this difficult moment and allow their exchange rates to deteriorate, perhaps significantly, or try to limit the decline and jeopardize some amount of growth. Jakarta voted for the latter on Wednesday, pushing borrowing costs higher, a move forecast by only a small number of economists. Central banks are caricatured as communicating in vague or opaque language. There was zero ambiguity from Bank Indonesia. This was about FX. Domestic conditions were secondary. For all its abundant resources, huge population and hype as a comer in global economics, the strategically important Southeast Asian nation lives in a financial world dominated by the greenback and the Federal Reserve.
