Indonesia Raises Rate to Four-Year High as Rupiah Extends Slide

Bank Indonesia raised its key interest rate for the fourth time since early June to support a weakening currency and cool inflation expectations.

Governor Agus Martowardojo and his board increased the reference rate by a quarter of a percentage point to 7.25 percent, the highest in more than four years. The outcome, announced in Jakarta today, was predicted by four of 23 economists surveyed by Bloomberg News, with three estimating a 50 basis-point move and the rest expecting no change. The central bank also raised the deposit facility rate.

The most aggressive tightening since 2005 may damp domestic consumption and hurt bank lending, adding to economic woes including Asia’s worst-performing currency in 2013 and inflation that’s quickened at the fastest pace in more than four years. Indonesia has joined Brazil and India in taking steps to support their currencies as the prospect of reduced U.S. monetary stimulus prompts investors to sell emerging-market assets.

“Raising rates to support the currency has had little effect,” Fred Gibson, a Sydney-based economist at Moody’s Analytics, said before the decision. Higher borrowing costs “will only slow growth further, exacerbating investor pessimism,” he said.

The rupiah fell 1.5 percent to 11,513 per dollar as of 3:02 p.m. in Jakarta, prices compiled by Bloomberg from local banks show. It has plunged about 16 percent this year, the worst performance among 11 major Asian currencies tracked by Bloomberg.

Most Aggressive

The deposit facility rate, also known as the Fasbi, was raised to 5.5 percent from 5.25 percent. Seven of 14 economists surveyed by Bloomberg expected an increase, while the rest saw no change.

The central bank’s increases in the benchmark in the past three months were the most aggressive since the reference rate was raised by 1.75 percentage points over two meetings in November and December 2005. In 2008, the central bank raised the key rate by 1.5 percentage points over six meetings.

Higher fuel and food costs led consumer prices to rise 8.79 percent in August from a year earlier, after an 8.6 percent gain in July, the government said this month.

Inflation may reach 9.2 percent by the end of 2013, Finance Minister Chatib Basri said Aug. 28. While inflation may continue to accelerate from a year earlier, Bank Indonesia Deputy Governor Perry Warjiyo said last week it will return to its normal month-on-month pattern in September.

New Equilibrium

The central bank has said it is allowing the rupiah to reach a new equilibrium after intervention to stem the currency’s decline reduced its foreign reserves. (IDGFA) Reserves last month held near the lowest level since October 2010, according to data compiled by Bloomberg.

Indonesia may sign accords this quarter that will allow it access to more than $30 billion from new and existing swap lines, Basri told reporters in Jakarta this week. Last month, it extended a line with the Bank of Japan valued at $12 billion that will allow the two to borrow from each other’s reserves.

Indonesia’s trade deficit widened to a record $2.3 billion in July, weighing on the current-account shortfall, which reached $9.8 billion in the second quarter, the largest in data compiled by Bloomberg going back to 1989. The government has announced loosening restrictions on mineral ore imports this year and higher taxes on luxury imported goods to address trade imbalances.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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