Indonesia Raises Main Rate for First Time Since 2008
Indonesia Unexpectedly Raises Main Rate First Time Since 200
Dimas Ardian/Bloomberg
Vehicles travel past the buildings of Bank Indonesia in Jakarta.
Vehicles travel past the buildings of Bank Indonesia in Jakarta. Photographer: Dimas Ardian/Bloomberg
Indonesia’s central bank unexpectedly raised its benchmark interest rate for the first time in more than two years after inflation climbed to a 21-month high.
The central bank increased its reference rate by a quarter percentage point, to 6.75 percent, Deputy Governor Halim Alamsyah told reporters today in Jakarta. The move, the first since October 2008, was predicted by only six of 22 economists. The rest forecast the measure to be kept unchanged at the lowest level since its introduction in July 2005.
The rupiah, Asia’s third-worst performing currency in the past year, climbed toward a four-week high after Indonesia joined Asian nations from India to South Korea in increasing rates. Indonesia may have more room to boost rates even at the risk of attracting more currency inflows as the rupiah has risen only 3.5 percent in the past 12 months, less than a third of the gain in Malaysian and Singapore currencies.
“Bank Indonesia has correctly addressed that it is important to act now,” said Vishnu Varathan, a Singapore-based economist at Capital Economics (Asia) Pte. “Investors capitulating from the asset markets on fears Bank Indonesia is caught behind the curve will find assurance that it is acting to curb inflation.”
Rupiah Gains
The rupiah rose 0.2 percent to 9,005 per dollar as of 2:46 p.m. in Jakarta, from 9,025 when local financial markets were last open on Feb. 2. The Jakarta Composite Index rose 0.4 percent. It has slid 7.3 percent from its Dec. 9 record high as investors were concerned the central bank has fallen behind regional peers in boosting rates to slow inflation.
The Reserve Bank of India on Jan. 25 raised rates for the seventh time in a year, boosting its repurchase rate by a quarter-point to 6.5 percent. Thailand’s central bank increased the one-day bond repurchase rate on Jan. 12 for the fourth time since the start of July, lifting it to 2.25 percent. The Bank of Korea raised its benchmark on Jan. 13 for the third time since the global financial crisis.
Consumer prices in Indonesia, Southeast Asia’s largest economy, rose 7.02 percent in January from a year earlier, the most since April 2009. Core inflation was 4.18 percent in January, easing from 4.28 percent the previous month.
Inflation Expectations
Bank Indonesia’s decision today is aimed at curbing inflation expectations, which are being stoked by volatile food prices and an increase in global commodity costs including oil, Governor Darmin Nasution said in a statement.
The bank maintained its inflation forecast for 2011 in the range of 4 percent and 6 percent and said the economy will probably expand by 6 percent to 6.5 percent during the year, according to the statement.
With Indonesia’s rate increase today, the Philippines is the only major Southeast Asian economies using interest rate as a policy tool that hasn’t raised its rate.
Among the steps the central bank had taken so far to control inflation was to order lenders to set aside 5 percent of their total foreign-exchange holdings as reserves from March this year, from 1 percent currently. In January, Bank Indonesia reintroduced a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows.
Inflation erodes the spending power of the poor. The World Bank estimates 29 percent of Indonesians earn less than $2 a day.
Growth Target
The central bank refrained from raising rates since 2008 as President Susilo Bambang Yudhoyono targeted annual average economic growth of 6.6 percent through the remainder of his term ending in 2014. Companies from PT Bank Pan Indonesia to AirAsia Bhd. are counting on rising demand in the world’s fourth-most populous nation to boost their businesses.
Indonesia’s economy grew 6.3 percent last quarter from a year earlier, accelerating from a 5.8 percent rate in the three months through September, according to the median estimate of 12 economists surveyed by Bloomberg News. The government will release fourth-quarter economic data on Feb. 7.
Indonesian stocks’ decline is a buying opportunity as the rural-based economy will benefit from rising commodity prices, Wilianto Ie, an analyst at Nomura Holdings Inc., said last month. Concerns about inflation getting out of hand due to “policy slippage” are unfounded and the slump in Indonesia stocks is a “window of opportunity,” said Mun Hon Tham, an analyst at Daiwa Securities Capital Markets Co.
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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