Indonesia has introduced more macro prudential measures to regulate the foreign liabilities of the banking sector. This is a sound strategy which will limit the extent to which any sudden change in capital flows disrupts the economy. The use of targeted measures to tackle this issue and the related stresses caused by rupiah appreciation also frees up interest rate policy to focus on its primary role of ensuring that core inflation pressures stay contained. We forecast that Bank Indonesia will use this option sooner rather than later and will lift its reference rate next month.
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