Indonesia Central Bank Unexpectedly Hikes Rate
Indonesia’s central bank surprised markets on Wednesday with an unexpected quarter-point rate hike to strengthen the rupiah.
The Board of Governors of Bank Indonesia, governed by Perry Warjiyo, decided to lift the seven-day reverse repo rate to 6.25 percent from 6.00 percent.
The current rate is the highest since 2016, when the bank made the seven-day reverse repo as its main policy rate.
The policy was tightened after retaining the rate for five consecutive meetings. The rate has been raised by cumulative 275 basis points since August 2022.
The deposit facility rate was also hiked to 5.50 percent and the lending facility rate to 7.00 percent.
Rates were expected to be left unchanged today.
Perry said today’s action is a pre-emptive and forward looking step to ensure inflation remains within the target range of 1.5 to 3.5 percent this year. Inflation stood at 3.05 percent in March.
The currency weakened about 5 percent against the US dollar since the start of the year despite the central bank interventions.
Economic growth this year was projected to be in the range of 4.7 percent to 5.5 percent.
Although the central bank made clear that supporting the currency would remain its key priority over the coming months, there is a good chance this will be a case of “one and done”, if the currency bottoms out soon as anticipated, Capital Economics’ economist Gareth Leather said.
The economist noted that the bank will certainly be wary about overdoing the tightening cycle as it has little to worry about on the inflation front.
Leather expects the BI to cut interest rates at its October meeting after the US Federal Reserve takes its first cut in September.
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