Indonesia raises key rate more than expected as rupiah weakens

JAKARTA – Indonesia’s central bank delivered a bigger-than-expected interest rate hike to stem inflation and stabilise the rupiah, marking an aggressive turn for policy makers who were monetary policy outliers until last month.

Bank Indonesia raised the seven-day reverse repurchase rate by 50 basis points, the biggest increment since 2018, to 4.25 per cent on Thursday.

That will surprise most of the 37 economists surveyed by Bloomberg who had predicted a 25 basis-point move, with only seven forecasting a half-point adjustment.

The move is aimed at shielding the rupiah amid renewed pressure on emerging market currencies after the United States Federal Reserve delivered a big 75 basis-point hike and signalled further aggressive tightening.

Although relatively resilient compared with regional peers, the currency’s weakness increases the risk of imported inflation at a time when consumer prices are already under pressure from the government’s move to wind down some fuel subsidies.

Expectations for economic growth to come in at the higher end of a 4.5 per cent-5.3 per cent forecast range allow the central bank room to focus on controlling inflation, which analysts see crossing the 7 per cent level in coming months following the fuel price hike.

Bank Indonesia governor Perry Warjiyo, who flagged risks to consumer prices from costlier food and fuel, said the bank would take steps to return the consumer price index within its 2 per cent-4 per cent target by the second-half of 2023.

He also said the bank will stabilize the rupiah in line with fundamentals.

The rupiah has lost about 5 per cent against the dollar this year, making it one of the better performers in Asia, where the South Korean won and Japanese yen have notched up losses of exceeding 15 per cent.

While strong commodity exports have lent support to the rupiah, a weakening global demand could narrow the current-account surplus and add to the currency’s vulnerability. BLOOMBERG