Bank Indonesia Surprises Market With Strong Interest Rate Rise i

Indonesia’s central bank doesn’t have the luxury to go against what is happening in the global financial market, senior deputy governor said, suggesting that Bank Indonesia would keep its policy tight next month.

By : Rieka Rahadiana & Adriana Nina Kusuma | on 3:17 PM July 11, 2013
Category : News, Business, Economy

The headquarters of Bank Indonesia, Indonesia's central bank, in Jakarta, Indonesia in this March 4, 2010 file photo. (Bloomberg Photo/Dimas Ardian) The headquarters of Bank Indonesia, Indonesia's central bank, in Jakarta, Indonesia in this March 4, 2010 file photo. (Bloomberg Photo/Dimas Ardian)

Bank Indonesia surprised the market on Thursday by hiking its benchmark policy rate by 50 basis points, twice as much as expected, to 6.50 percent as it stepped up its battle to stem outflows and combat inflation.

The central bank also raised the overnight deposit facility rate, known as FASBI, by 50 basis points to 4.75 percent.

In June, policymakers also raised the benchmark rate and FASBI by 25 basis points. Bank Indonesia (BI) became the first Asian central bank to hike a policy rate since 2011.

BI Governor Agus Martowardojo, who took office in May, promised "quite a wide" number of measures on Thursday as part of efforts to contain inflation, which the central bank projected at 7.5 percent on an annual basis this month, compared with 5.9 percent in June.

This month will see the full impact of fuel price hikes made on June 22. Also, demand will rise during the Muslim fasting month, which began this week.

BI Deputy Governor said with Thursday's hikes, "we believe that market confidence will be stronger. Therefore, the reversal of capital will be shifted. In the last one week, there was net buy particularly in government bonds. We are sure that foreign capital inflow will be stronger." The market was surprised by the size of Thursday's hikes.

"Investors have been looking for stronger policy signals and this is it," said Prakriti Sofat, regional economist at Barclays Capital in Singapore, adding that more assertive rate hikes like these "will serve to anchor inflation expectations and bolster their currency."

The economist said Barclays expects 50 bps hike in the coming quarter.

In June, Indonesia's economy was badly impacted by a heavy sell-off in bonds, stocks and the rupiah as investors worried about the Federal Reserve's plan for reduce its monetary stimulus and about inflation and other economic problems in Indonesia.

Bank Indonesia reported a nearly $4 billion of capital outflows in June. Offshore ownership in government bonds fell to 31.8 percent of total outstanding as of July 9, from 33.8 percent at end of May.

June's foreign-exchange reserves dropped $7 billion to $98.1 billion, the lowest level since 2011, as a result of BI intervention in the forex market to defend the ailing rupiah from mounting pressure.

Higher interest rates should help the bank to prop up the rupiah, which has fallen about 3.5 percent against the dollar this year. In 2012, the rupiah was the worst performing emerging Asian currency, shedding 6 percent against the dollar.

Ten of 12 analysts polled by Reuters prior to the announcement had expected a 25 basis point hike on the benchmark policy rate. The other two forecast a hold at 6.0 percent.

Reuters

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