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Indonesia Seen Raising Rates Further as Rupiah Trumps Gro

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Sept. 13 (Bloomberg) -- Bank Indonesia will probably need to further tighten monetary policy after unexpectedly raising interest rates a second time in two weeks yesterday, as pressure to shore up the rupiah outweighs the threat to growth.

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 central bank also boosted the deposit facility rate. Economists at Credit Suisse Group AG, Morgan Stanley and Citigroup Inc. are among those predicting the central bank will raise borrowing costs again next quarter.

The most aggressive tightening since 2005 may damp domestic consumption and hurt bank lending as policy makers grapple with Asia’s worst-performing currency in 2013 and the fastest inflation 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.

“Monetary conditions need to be tightened further and probably will be,” said Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore. “Of course, with higher interest rates will come lower economic growth. But, in our view, this is exactly what the country requires to iron out its imbalances.”

Reversed Losses

The rupiah fell 0.8 percent as of 11:52 a.m. in Jakarta, after paring losses yesterday following the decision, prices compiled by Bloomberg from local banks show. It has plunged more than 15 percent this year, the worst performance among 11 major Asian currencies tracked by Bloomberg.

Yesterday’s benchmark increase 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’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.

“Policy makers seem increasingly to realize the importance of signaling tighter monetary policy through interest-rate hikes instead of just macro prudential measures,” said Helmi Arman, an economist at Citigroup in Jakarta, who expects one more rate increase in October. “The risk of growth overkill from monetary policy tightening is not extremely high.”

Fasbi Rate

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

The central bank has “no intention” to over tighten and will balance between safeguarding the economy in the short term and supporting longer-term prospects sustainably, Deputy Governor Perry Warjiyo said today.

Policy makers in South Korea and the Philippines held their key rates yesterday, while New Zealand’s central bank signaled it may need to raise borrowing costs next year after also keeping its benchmark unchanged.

Bank Indonesia yesterday cut its 2013 growth forecast to between 5.5 percent and 5.9 percent, from as much as 6.2 percent earlier, citing surveys that showed slowing household consumption. The expansion in 2014 will be 5.8 percent to 6.2 percent, from as much as 6.4 percent previously, it said.

Cyclical Slowdown

“The economy is slowing cyclically and recent policy tightening to anchor inflation expectations may extend this slowdown,” said Roland Randall, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “Slowing growth is also very likely to cool import growth.”

The trade gap widened to a record $2.3 billion in July, weighing on the current-account shortfall, which reached $9.8 billion last 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.

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. The central bank said yesterday month-on-month price gains will be “very low” in September and the inflation rate may be 9 percent to 9.8 percent at the end of the year.

“The prospect of easing inflation pressure is also affected by the impact of slowing domestic demand as well as measures to strengthen coordinating policies between Bank Indonesia and the government in controlling inflation,” the central bank said yesterday.

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. 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, Finance Minister Chatib 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.

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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