Indonesia hikes policy rate to give rupiah a lifeline

JAKARTA (REUTERS) - Indonesia's central bank surprisingly hiked interest rates, its second shock for the market in two days as it tries to reduce investors' concerns about the region's financial markets.

Bank Indonesia (BI) had been widely expected to hold fire on policy until the government made the politically-sensitive decision to cut costly fuel subsidies, which are deepening the country's budget and current account deficits.

But on Thursday, BI increased its benchmark rate 25 basis points to 6.0 per cent from the record low where it had been stuck since February last year, and comes in the face of mounting pressure on the rupiah, which has been declining along with other Asian currencies.

The last time Bank Indonesia increased rates was February 2011. Thursday's meeting was the first to be presided over by new central bank governor, Agus Martowardojo, a respected career banker who was previously finance minister for Southeast Asia's biggest economy.

The central bank described the rate hike as "part of Bank Indonesia's policy mix to respond pre-emptively to rising inflation expectations and to maintain macroeconomic stability and the financial system amid increasing uncertainty in global financial markets."

The hike had limited impact on the beleaguered currency or stocks, which both continued to look weak.


"It is a sensible move. These inflationary pressures are the result of weak currencies across the emerging world," said Peter Elston, head of Asia-Pacific strategy and asset allocation at Aberdeen Asset Management in Singapore.

The increase followed Tuesday night's surprise announcement by the central bank it was raising its overnight deposit facility rate (FASBI), also by 25 points, to 4.25 per cent.

"Bank Indonesia's decisions will not have been made any easier by the fact that there is clear evidence that economic growth is slowing, particularly in the area of investment spending," Robert Prior-Wandesforde, director of Asian economic research at Credit Suisse in Singapore, wrote.

BI said growth was tending towards 6.1 per cent this year, which is below the most recent target in the state budget, 6.3 per cent.

Before Thursday's meeting, all 11 analysts in a Reuters poll had expected the benchmark rate to remain unchanged, assuming the central bank would not make raise it until the government finally pushed up fuel prices to cut costly subsidies which are eating up budget spending and worsening a current account deficit.

That issue has become locked in political horse-trading after President Susilo Bambang Yudhoyono refused to raise prices until Parliament agreed to a financial package to soften the impact on the poorest sector of society.

On Wednesday, the central bank said it was ready to supply dollars "in large amounts" to stabilise the rupiah and to buy government bonds on the secondary market.