Bank Indonesia (BI) left its policy rate at 6.5% today, as expected. However, it also announced that the reserve requirement will rise from 5% to 8%, starting from the beginning of November. The economic upswing remains strong and inflation is already above the target ceiling. We expect that BI will hike its policy rate by 25bp in October and then to 7.0% by year-end. Further rate rises are probable in 2011 as well while the rupiah appreciation trend, we judge, looks set to continue.
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