Bank of Indonesia Hikes Key Interest Rate to Boost Fragile Rupiah
Indonesia’s central bank on Thursday (17/05) hiked its benchmark interest rate for the first time since November 2014, as expected, in a bid to bolster the fragile rupiah.
Bank of Indonesia (BI) raised the 7-day reverse repurchase rate by 25 basis points to 4.50 percent. In 2016 and 2017 combined, BI cut the key by 200 bps to try to spur lending and faster economic growth.
In a Reuters poll, 13 of 21 economists had predicted a rate at Thursday’s meeting, the last for Governor Agus Martowardojo.
The governor, who will be succeeded by Perry Warjiyo later this month, said the hike was in response to rising global financial uncertainty amid tighter US dollar liquidity.
“BI will continue to monitor economic developments and is ready to take firmer actions to ensure macroeconomic stability,” Agus said.
In the month since BI last met on April 19 and said it would be an “overkill or counterproductive” to be raising rates, consensus expectations swiftly turned to see a rate rise as needed to put a floor under the falling rupiah.
Southeast Asia’s largest economy is one of the region’s worst affected by the combination of rising US yields and higher oil prices, and has seen about $4 billion leave its markets over the past month as foreign investors review their exposure to higher-yielding emerging markets.
The rupiah has fallen more than 5 percent to past 14,000 per dollar in four months as Indonesian 10-year bond yields jumped more than a percentage point over that period, and the stock market is down 8 percent this year.
On Thursday, BI maintained its 2018 economic growth outlook at 5.1-5.5 percent and said that annual inflation would remain within its target range of 2.5-4.5 percent.
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