Indonesia surprises with 25bp benchmark rate hike
Indonesia’s central bank surprised the market for a second time this week by raising its benchmark interest rate, which had been unchanged for 15 months, by 25 basis points to 6.0 per cent on Thursday.
The decision follows Bank Indonesia’s unexpected hike late Tuesday night of its overnight deposit facility rate (FASBI) by 25 basis points to 4.25 per cent to try to bolster the weakening rupiah.
All 11 analysts in a Reuters poll had expected the benchmark rate to be kept Thursday at the record low 5.75 per cent, where it had been held since February last year. They thought the central bank wouldn’t hike the rate until the government finally pushes up fuel prices to cut costly subsidies and contain budget and current account deficits.
Along with other regional emerging economies, Indonesia’s financial markets have taken a knock this week, on a combination of domestic and global worries.
The central bank said the hike “was part of Bank Indonesia’s policy mix to respond pre-emptively to rising inflation expectations and to maintain macroeconomic stability and financial system amid increasing uncertainty in global financial markets.”
Thursday’s policy meeting was the first presided over by BI’s new governor Agus Martowardojo, who was previously finance minister.
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.
Indonesia’s foreign-exchange reserves, tapped by the central bank for periodic intervention, have been declining this year. At the end of May, reserves stood at $105.2 billion, compared with $112.8 billion at the end of last year.
The latest pressure on Indonesia’s financial markets come at a time the government already looks to be struggling to meet its ambitious this year target of 6.3 per cent economic growth, and it faces criticism over slow policy-decision making.
Considerable attention has focused on when the government will increase fuel prices to reduce the heavy burden on its budget from the subsidies, which are also blamed for a widening current account deficit.
Indonesia has repeatedly put off a decision on subsidies, whose reduction is expected to significantly raise the inflation rate.
The government is waiting for final approval by parliament of a financial package to alleviate the impact of costlier fuel before it pushes up prices at petrol stations.
In May, annual inflation eased to 5.47 per cent, just inside BI’s target range of 3.5-5.5 per cent this year. A central bank official has said that after fuel prices are increased, the inflation rate could temporarily be as high as 7.8 per cent.
The rupiah, which earlier this week was weaker than 10,000 to the dollar in offshore trading, was at 9.870 per dollar, down 0.2 per cent for the day but slightly stronger than before the BI announcement.
Indonesia’s stock index has fallen about 9 per cent this month.