Indonesia shocks with rate hike after trade gap widens

BI has been raising interest rates to curb a currency rout triggered by Fed tightening


JAKARTA • Indonesia’s central bank unexpectedly raised its benchmark interest rate for a sixth time this year to help rein in a widening trade deficit and bolster the currency.

The seven-day reverse repurchase rate was raised by 25 basis points (bps) to 6% yesterday, surprising most economists who had predicted no change.

That takes the cumulative rate hikes since May to 175bps, making Bank Indonesia (BI) one of the most aggressive central banks in Asia this year.

“This decision is part of BI’s further measures to strengthen the efforts to lower the current-account deficit until it reaches the safe level,” governor Perry Warjiyo (picture) told reporters.

“The increase in the interest rate is also expected to boost the attractiveness of domestic financial assets and to anticipate global interest-rate hikes in the coming months.”

Of the 31 economists surveyed by Bloomberg, just three correctly predicted the decision, with the rest forecasting the rate would be left unchanged.

BI has been raising interest rates to curb a currency rout triggered by US Federal Reserve (Fed) tightening.

The government is also trying to reduce imports to narrow the current-account deficit, a key vulnerability for the economy. Data yesterday showed another big trade shortfall of US$1.8 billion (RM7.56 billion) in October.

That would put pressure on the current-account deficit, which widened to 3.4% of GDP in the third quarter, the biggest since 2014.

The central bank expects the deficit to come in below 3% of GDP this year and reach around 2.5% in 2019. While the rupiah gained more than 3% against the dollar this month, providing some respite for policymakers, it remains volatile.

And with the Fed expected to hike again, Indonesia may be in for some more pain.

On the inflation front, policymakers don’t have much to worry about.

Consumer prices rose 3.2% in October from a year ago, well within the central bank’s 2.5% to 4.5% target band.

“With key ingredients for sustained currency stability still elusive, we see scope for BI to lift rates another 25bps at its next meeting on Dec 20. The Fed continues to signal more hikes ahead.

“What’s more, time is getting short to buttress the currency before any policy shifts might be seen as interference with Indonesia’s election in April,” said Tamara Henderson of Bloomberg Economics.

The rupiah jumped as much as 0.8% against the dollar to reach a one-week high of 14,665. The Jakarta Composite Index extended gains to as much as 1.5% after the decision.

The central bank forecasts economic growth of 5.1% this year.