Indonesia Unexpectedly Raises Rate for First Time Since 2011

Bank Indonesia unexpectedly raised its key interest rate for the first time since 2011 as Governor Agus Martowardojo accelerates efforts to support the currency and cool inflation expectations. The rupiah pared losses.

The central bank increased the reference rate by a quarter of a percentage point to 6 percent, it said in Jakarta today. All 19 economists surveyed by Bloomberg News expected no change.

The surprise increase comes after the central bank this week raised the rate it pays lenders on overnight deposits and said it’s ready to buy government bonds from the secondary market to support the weakening rupiah. Indonesia joins emerging markets such as Brazil in addressing an outflow of capital amid concern that developed nations will scale back the liquidity they have been pumping.

“Bank Indonesia deserves a pat on the back for this,” said Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore. “They clearly are showing an intent to try and stabilize the currency in a stronger way than I think all of us anticipated.”

The rupiah fell 0.2 percent to 9,883 per dollar as of 4:07 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. It touched 9,925 earlier, the weakest level since Sept. 15, 2009. One-month non-deliverable forwards dropped 0.1 percent to 10,125 after sliding as much as 1.3 percent. The contracts traded at a 2.4 percent discount to the spot rate.

First Decision

Rupiah forwards rose the most in a year yesterday after Bank Indonesia increased the deposit facility rate, also known as the Fasbi, by a quarter of a percentage point to 4.25 percent. The Fasbi rate was last raised in August.

This is Martowardojo’s first rate-decision meeting after taking over from Darmin Nasution last month, and he is contending with slowing growth, while inflation is poised to quicken as the government prepares to increase fuel prices.

His move to raise rates contrasts with that of central banks in New Zealand, South Korea and the Philippines, which held borrowing costs today.

“This came in as a strong statement by the new BI governor, particularly since some in the market had previous doubts about his independence from the government,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. There may be another 25 basis-point increase in the benchmark rate in the next session, he said.

Capital Outflow

Brazil said yesterday it will eliminate a tax on currency derivatives in a bid to arrest the decline of the real that is at a four-year low. Overseas investors have pulled more than $2 billion from stocks and local-currency bonds in Indonesia in the past two weeks, putting pressure on the rupiah as rising U.S. Treasury yields lure capital from emerging markets.

Bank Indonesia is studying plans to allow banks to sell their rupiah term deposits to other lenders to ensure rupiah and dollar stability in the market, Deputy Governor Perry Warjiyo told reporters in Jakarta today.

Thai Finance Minister Kittiratt Na-Ranong said today the country should use its foreign reserves as a “cushion” to prevent excessive movements in the baht. Bank of Thailand Governor Prasarn Trairatvorakul said the central bank has sold “a certain amount of dollars” in the past week to smooth volatility in its currency.

Global Outlook

The World Bank yesterday cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction.

The Indonesian economy grew 6.02 percent in the first three months of 2013 from a year ago, after expanding 6.11 percent the previous quarter. The government earlier lowered its GDP target for 2013 to 6.3 percent from 6.8 percent, and predicts inflation will quicken to 7.2 percent this year from an initial estimate of 4.9 percent should fuel prices be raised.

Consumer prices rose 5.47 percent in May, with the pace of gains slowing for a second month.

President Susilo Bambang Yudhoyono has made any boost in fuel prices conditional on Parliament approving compensation programs for the poor. Failure to lower subsidies in 2012 led to a record current-account gap, hurting the rupiah as foreign investors lost confidence.

The central bank is “moving toward a tightening bias” as the planned fuel-price increase adds risks to inflation and economic stability, Warjiyo said May 22. Raising the benchmark rate would be the “most credible” response to damp price expectations, Deputy Governor Halim Alamsyah said in an interview this month.

“Today’s BI rate hike and the Fasbi rate hike are steps in the right direction and clear short-term positives for the rupiah,” Standard Chartered Plc analysts Eric Sugandi, Jennifer Kusuma, Thomas Harr wrote in a note. “We expect BI to become more aggressive in its policy to manage inflationary pressures and defend the rupiah.”

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