Indonesia raises rates in bid to revive rupiah

PUBLISHED : Friday, 30 August, 2013, 12:00am
UPDATED : Friday, 30 August, 2013, 3:52am

Bank Indonesia raised its benchmark interest rate by half a percentage point in an unscheduled move and signed an extended swap agreement to tap Japan's reserves as it sought to tame inflation and shore up a slumping currency.

The central bank increased the reference rate to 7 per cent from 6.5 per cent, it said after a board of governors meeting in Jakarta yesterday, and raised the deposit facility rate by half a point to 5.25 per cent.

It also signed an extended bilateral swap deal with the Bank of Japan valued at US$12 billion that will allow the two central banks to borrow from each other's foreign exchange reserves.

Indonesia joins Brazil in raising borrowing costs this week as the prospect of reduced US monetary stimulus prompts investors to sell emerging-market stocks and currencies.

A record current account deficit in the second quarter for the country and worse-than-estimated economic growth and inflation data have led to a stock-market slump and helped push the rupiah to its weakest level since April 2009 this week.

"What they can do now is to limit the collateral damage from the potential US policy shift," said Wellian Wiranto, a Singapore-based investment strategist at the wealth management unit of Barclays.

"The Fed's previously abundant fountain of liquidity is turning into a black hole pulling everything in. BI can only try to anchor things as much as they can."

The rupiah spot rate stood at 10,935 yesterday afternoon.

The central bank raised the key rate by a combined 0.75 percentage point in June and last month before keeping it unchanged at its meeting on August 15 as slowing growth deterred a third consecutive increase.

The rupiah's almost 6 per cent slump in the past two weeks may have pressured the central bank to increase borrowing costs again before a scheduled policy review on September 12.

"The central bank is finally responding to the market pressure," said Jemmy Paul, a Jakarta-based equity fund manager at Sucorinvest Asset Management.

If the rupiah remained weak, there would be more tightening measures, he said.