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Bank Indonesia Unexpectedly Raises Key Interest Rate

Bank Indonesia Unexpectedly Raises Key Interest Rate

Indonesia's central bank on Thursday unexpectedly raised its benchmark interest rate for the first time since 2011 in a bid to contain rising inflation expectations and to maintain macroeconomic and financial stability.

The BI rate was lifted by 25 basis points to 6 percent from a record-low of 5.75 percent. The rate was on hold since a quarter-point reduction in February 2012. The BI rate was last raised in early 2011.

In a statement today, Bank Indonesia said the move was part of its "policy mix to respond pre-emptively to rising inflation expectations and to maintain macroeconomic stability and financial system stability amid increasing uncertainty in global financial markets".

The rate hike comes a couple of days after Bank Indonesia raised the interest rate on deposit facility for the first time since August 2012. The rate, which is also called fasbi, was hiked by 25 basis points to 4.25 percent on Tuesday to counter a slide in the rupiah.

In today's statement, the central bank said it "continues to stabilize the rupiah exchange rate in line with its economic fundamentals and maintains adequate liquidity in the foreign exchange market."

The bank acknowledged that there was significant depreciation pressure on rupiah as concerns over a reversal in U.S. Fed's stimulus program triggered financial assets outflow from emerging markets. Negative sentiment toward domestic fiscal and current account deficits also influenced the currency movement, it said.

The bank anticipates a rise in inflation expectations as the government plans to increase fuel prices to reduce spending on subsidies. Administered prices are rising, triggered by second-phase of electricity tariff hike and disruption on the supply of LPG, the bank observed.

Bank Indonesia pledged to strengthen its monetary operation "by enhancing monetary instruments and financial market deepening, both in rupiah and foreign exchange." The bank also noted that macroprudential policies are being prepared to prevent excessive risks in certain sectors.

Today's meeting was the first for Governor Agus Martowardojo after taking over the post from Darmin Nasution in May. Martowardojo, a former Finance Minister of the country, had vowed to maintain price stability in view of the upcoming fuel price hikes, which could fan inflation.

The central bank expects Indonesia's economic growth in the second quarter to be biased towards the lower bound of its earlier forecast range of 5.9-6.1 percent amid a slowdown in the global economy.

Indonesia's economic growth tumbled to a two-year low in the first quarter of 2013, with the gross domestic product rising 6.02 percent on a yearly basis, according to official data released last month.

The continuing crisis in Europe and a slowdown in China's economy are restraining growth in exports and investment, especially non-construction sector, the central bank said.

Bank Indonesia forecasts current account deficits in the second quarter to be higher than that in the first quarter, largely due to seasonal factors.

Indonesia's export performance is still subdued with weak external demand and declining global commodity prices, while imports including non-oil import continue to increase, the bank said.

by RTT Staff Writer

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