BI holds benchmark rate steady as Indonesian Rupiah weakens

• Bank Indonesia's rate decision weighs on the Indonesian Rupiah, lending support to USD/IDR.
• The benchmark rate remained at 5.75% following BI's decision, rather than rising to 6.0% as expected.
• An 83.9% probability of rates remaining unchanged next week is priced into markets, according to the FedWatch Tool.

Bank Indonesia (BI) left its benchmark rate at 5.75% for a fourth consecutive policy meeting, confounding market expectations of an increase to 6.0%. The decision puts pressure on the Indonesian Rupiah (IDR), with USD/IDR advancing for a third day in a row to trade near 18,040 during Wednesday's European session. Meanwhile, the central bank raised its overnight deposit rate by 25 bps to 5.00%, while leaving lending facility rates at 6.50%.

Safe-haven demand for the US Dollar (USD) also underpins the rise in USD/IDR  as higher oil prices intensify concerns over global inflation. Crude prices are climbing while traders weigh conflicting signals on diplomatic contacts between the United States (US) and Iran. Negotiations are continuing, but sentiment came under pressure after high-level meetings in Tehran. Pakistan’s army chief, Field Marshal Asim Munir, held discussions there with senior Iranian diplomatic and military leaders on bilateral relations and the progress of talks with Washington. According to a diplomat involved in those discussions, efforts to resolve the conflict continue, but reports suggesting a final agreement is imminent are premature.

Attention in financial markets remains firmly on the Federal Reserve's (Fed) next policy steps. The CME FedWatch Tool shows traders assigning an 83.9% probability to unchanged interest rates next week and a 90% chance of an increase in December. Fed Chair Kevin Warsh, however, adopted a neutral position, stressing that he does not "prejudge" interest rate decisions. His remarks offered markets no clear indication of whether the central bank would raise rates or leave them unchanged at its forthcoming October policy meeting.