Bank Indonesia faces mounting pressure to raise interest rates on Wednesday as economists revise their forecasts after global index provider MSCI warned it may downgrade the country's stock market from emerging-market status, setting off a selloff in stocks and the rupiah.
Citibank now expects a pre-emptive 50 basis-point increase to 6.25%, abandoning its earlier call for no change. Capital Economics and Permata Bank expect a 25 basis-point hike to 6%. The central bank has held its benchmark seven-day reverse repurchase rate at 5.75% since June.
MSCI said Friday it is considering moving Indonesia to "standalone" from the emerging-market status it has held since 1989, causing the Jakarta Composite Index to suffer the worst two-day sell-off recorded, before recovering about 3% Tuesday after authorities announced steps to improve market transparency and price discovery, including expelling tightly held companies from the flagship index.
Meanwhile, rupiah weakened to 18,030 per dollar on Tuesday, near its June record low, falling about 8% this year.
"Not delivering a rate hike [on Wednesday] would run the risk of disappointing investors and fueling further downward pressure on the currency," said Jason Tuvey, deputy chief emerging markets economist at Capital Economics. "A decision to hold rates on Wednesday could also revive concerns among investors that Bank Indonesia is kowtowing to political pressure."