Indonesia fights Turkey contagion with rate hike

By BLOOMBERG

JAKARTA • Indonesia’s central bank surprised most economists by raising its benchmark interest rate a fourth time since May, moving swiftly to contain the volatility sweeping across emerging markets (EMs) and curb a slide in its currency.

The seven-day reverse repurchase rate was raised to 5.5% from 5.25%, as forecast by seven of 28 economists in a Bloomberg survey. The rest had predicted no change.

Turkey’s crisis is adding to Indonesia’s woes, dragging down a currency that’s already been hit by an EM rout triggered by higher US interest rates and a stronger dollar.

Bank Indonesia has been among the most aggressive in Asia in tightening policy this year, raising rates by a total of 1.25 percentage points since mid-May, with governor Perry Warjiyo reiterating yesterday the central bank’s pledge to remain proactive.

President Joko Widodo ordered import curbs on Tuesday to shore up foreign reserves, which have been drained by almost US$14 billion (RM57.4 billion) since January as the central bank stepped up intervention.

“The decision is consistent with efforts to maintain the attractiveness of domestic financial markets and control the current-account deficit, so that it will still be in the safe level,” Warjiyo said.

Indonesia’s current-account deficit and a relatively high foreign ownership of government bonds make the economy vulnerable to outflows. Government data earlier yesterday showed the trade gap widened to a five-year high of US$2 billion in July, putting pressure on the current account and the rupiah.

Indonesia’s strengthening economy is giving confidence to policymakers, with growth accelerating to a five-year high of 5.3% last quarter. Inflation remains within the central bank’s 2.5% to 4.5% target band.