The Fed Interest Rate Hike Could Accelerate Capital Outflow
Liza Camelia Suryanata, Head of Research at Kiwoom Sekuritas Indonesia, stated that the interest rate hike by the US central bank, the Federal Reserve, could accelerate capital outflow from domestic financial markets. This condition is exacerbated by the US 10-Year Treasury Yield reaching approximately 5%.
As reported, the Fed has raised the Federal Funds Rate (FFR) to a range of 3.75% to 4.0% on Wednesday (16/9) local time. This move marks the first interest rate hike by the US central bank since July 2023, with signals suggesting this may not be the final increase for the year.
“However, the most decisive factors remain the combination of the US10Y, DXY, the Rupiah, SBN yields, and domestic earnings. If the USD/IDR breaks 17,700 alongside the 10-year Indonesian Government Bond (SUN10Y) exceeding 7.30%, the pressure on Indonesia will become more serious,” Liza stated in her remarks on Thursday (1s7/9).
Liza explained that the 25 bps Fed rate hike, along with the possibility of further increases, remains a burden for the Jakarta Composite Index (IHSG). The primary pressure stems from the transmission of the US10Y remaining above 5%, the weakening of the Rupiah, and movements in foreign fund flows.
“Until the end of the year, I still see the IHSG as volatile with mixed-to-negative foreign flows. Kiwoom’s 2026 target remains at 7,250-7,700, but given current conditions, I am more conservative. As long as it can close in the 7,000 range (the psychological level of 7,000) up to 7,200, I will not rush an official revision, provided the Rupiah and sovereign risks remain controlled,” she revealed.
Nevertheless, Liza noted that domestic investors currently possess much stronger absorption capacity against foreign selling. However, this domestic liquidity may not be sufficient to fully prevent an IHSG decline if selling is concentrated on large-cap index heavyweights.
In the short term (1-3 months), the IHSG is predicted to remain fluctuant. Pressure could intensify if the Fed raises interest rates by another 25 bps this year to the 4.00–4.25% level. Conversely, if US inflation and labour data soften, expectations for rate hikes may decrease, improving capital inflows.
Regarding domestic monetary policy, Liza expects Bank Indonesia (BI) to maintain its benchmark interest rate at 5.75% with a hawkish bias.
“If the Rupiah breaks 17,700-18,000 accompanied by increasing outflows, the likelihood of BI raising the rate by 25 bps to 6.00% will increase. Maintaining the BI Rate supports growth and credit, whereas a hike helps stabilise the Rupiah and the carry of SBN, but simultaneously increases the cost of capital,” she concluded.
The IHSG strengthened by 0.40% to 6,462.43 on Thursday afternoon. The market is now awaiting Bank Indonesia’s response following the Fed’s rate hike to 3.75-4.00 percent.
In a press conference, Fed Chair Kevin Warsh expressed concerns regarding inflation, noting that too many product categories are involved.
The 25 basis point (bps) increase by the Federal Reserve to 3.75%-4.00% has the potential to strengthen pressure on the Rupiah.
US President Donald Trump has urged the Fed to immediately lower interest rates to 1% or lower following the recent increase to 3.75-4%.
The Rupiah exchange rate opened weaker by 43 points to the level of Rp17,739 per US dollar on Thursday (17/9) following the 25 bps Fed rate hike.
The IHSG closed sharply lower by 4.57% to the level of 7,577 on Wednesday (4/3/2026). A combination of Fitch Ratings revising its outlook to negative and Middle East conflicts triggered massive capital outflows.
IHSG stocks plummeted by up to 8 percent after MSCI delayed its rebalancing. Economists assess that the panic selling is temporary and the market has the potential to rebound next week.
Indef researcher Andry Satrio Nugroho stated that although Indonesia’s foreign exchange reserves remain within safe limits for three months of imports, investor concerns persist.