Indonesia’s central bank unexpectedly raised its benchmark interest rate, stepping up its campaign to contain inflation (IDCPIY) and shore up the rupiah.
Governor Agus Martowardojo and his board increased the reference rate by 25 basis points to 7.5 percent, the central bank said in Jakarta today. Only one out of 25 economists surveyed by Bloomberg News predicted the move.
This is the fifth unexpected rate increase since Martowardojo took office in May, as he seeks to bolster the policy credibility of a nation that was among the worst hit in recent months as capital flowed out of emerging markets and the current-account deficit widened to a record. The rupiah, which has tumbled 16 percent since Federal Reserve Chairman Ben S. Bernanke raised the prospect in May of tapering bond purchases, pared declines after today’s announcement.
“The move is preemptive and they’re willing to live with lower growth, lower credit growth, lower import growth so long as the current account is at a more manageable magnitude,” said Chua Hak Bin, an economist at Bank of America Corp. in Singapore. “Nine months ago, there were some concerns that BI was behind the curve. They’re also acting to restore their credibility, to preempt further concerns.”
The rupiah was little changed at 11,600 per dollar as of 3:38 p.m. in Jakarta, after losing as much as 0.8 percent earlier, prices compiled by Bloomberg from local banks show. The currency is the worst performer this year among 11 major Asian currencies tracked by Bloomberg.
Indonesian officials are grappling with a depreciated exchange rate, elevated inflation and diminished foreign capital inflows undermining President Susilo Bambang Yudhoyono’s legacy of economic stability before he steps down next year.
With today’s move, the central bank has raised its key rate by 1.75 percentage points since early June to shore up the rupiah and stem price gains. Inflation remained above 8 percent for a fourth month in October.
The current-account shortfall was 4.4 percent of GDP in the three months through June. Bank Indonesia will release the third-quarter figures tomorrow.
Narrowing the deficit is the number one priority for Indonesia, and the government is planning a policy package this month to help the balance of payments, Finance Minister Chatib Basri said Nov. 7.
“Earlier in the year, we sensed that BI was tolerant of growing external imbalances as long as capital flows were still coming and deemed sufficient as a counterbalance,” said Helmi Arman, a Jakarta-based economist at Citigroup Inc. and the only analyst in the Bloomberg survey to predict the outcome. “Now BI has a clear objective of bringing down the current account deficit. Hence even though bond market capital flows recover, BI can tighten monetary policy if data outcomes do not point to a current-account deficit reduction that meets expectations.”
The central bank today also raised the deposit facility rate to 5.75 percent from 5.5 percent.
GDP increased 5.62 percent in the three months ended Sept. 30 from a year earlier, after climbing 5.83 percent in the second quarter, the government said Nov. 6. Bank Indonesia cut its 2013 economic growth forecast last month to between 5.5 percent and 5.9 percent, from as much as 6.2 percent earlier.
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