Indonesia lifts rates to cap inflation after fuel hike

An employee counts Indonesian Rupiah at a money change outlet in Jakarta on June 14, 2013. Indonesia's central bank on Thursday, July 11, 2013, hiked its key interest rate for a second straight month as it seeks to keep inflation in check after a hug
An employee counts Indonesian Rupiah at a money change outlet in Jakarta on June 14, 2013. Indonesia's central bank on Thursday, July 11, 2013, hiked its key interest rate for a second straight month as it seeks to keep inflation in check after a huge rise in the price of fuel. -- FILE PHOTO: AFP

JAKARTA (AFP) - Indonesia's central bank on Thursday hiked its key interest rate for a second straight month as it seeks to keep inflation in check after a huge rise in the price of fuel.

The decision by Bank Indonesia to lift rates by 50 basis points to 6.50 per cent came as a surprise, with most economists expecting a 0.25 percentage point rise. It had announced a 25 point rise in June.

The move will also provide much-needed support to the flagging rupiah, which has tumbled against the dollar as foreign investors retrench in expectations the US Federal Reserve will wind down its easy-money stimulus programme.

The government raised the price of petrol by 44 per cent and diesel by 22 per cent last month, the first hike since 2008 as Southeast Asia's top economy seeks to reduce crippling subsidies.

But the measure, which sparked violent protests across the country, pushed inflation to 5.90 per cent on-year last month owing to the higher cost of transporting goods and public transport. The government has an inflation target range of 3.5-5.5 per cent for 2013.

Economists had predicted inflation could accelerate to more than seven per cent in the coming months.

The bank also increased the rate it pays lenders for overnight deposits by 50 basis points to 4.75 per cent, a move aimed at reducing money supply, which should also slow the pace of inflation.

"We have taken these steps to ensure that inflation, which accelerated after the fuel price hike, will return to its target range soon," said bank governor Agus Martowardojo.

The hike in June was aimed principally at shoring up the rupiah after the currency fell to multi-year lows owing to huge outflows of capital.