Indonesia Fights Inflation With More-Than-Forecast Rate Rise

Bank Indonesia raised its key interest rate more than economists forecast to bolster a weakening currency and ease inflation pressures after the government increased fuel prices last month.

The central bank boosted the reference rate by 50 basis points to 6.5 percent, Governor Agus Martowardojo said in Jakarta today. The outcome was predicted by three of 19 economists surveyed by Bloomberg News, with the majority expecting a 25 basis-point increase. It also raised the deposit facility rate to 4.75 percent from 4.25 percent.

Indonesia in June became the region’s first major economy to boost rates this year, and the back-to-back increase may bolster confidence in the rupiah as the central bank tries to shore up one of Asia’s worst performing currencies. Price gains are expected to peak in July, Martowardojo said last week, citing seasonal factors including the observance of the fasting month of Ramadan in the world’s most populous Muslim nation.

“The central bank is keen to head-off any potential second-round effects on core inflation,” said Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore. “Bank Indonesia is also aiming to take some of the pressure off the rupiah. The sharp fuel-price rise and associated interest-rate tightening measures, which may well not have finished yet, is coming at a time when the economy is softening.”

The rupiah was little changed at 9,973 per dollar as of 4:25 p.m. in Jakarta, prices compiled by Bloomberg from local banks show. It has fallen about 6 percent in the past 12 months, the worst performer among 11 Asian currencies after the yen and the Indian rupee.

Foreign Reserves

Indonesia’s foreign-exchange reserves fell to $98.1 billion last month from $105.15 billion in May, the central bank said as it intervened. The levels are still adequate to stabilize the currency, Martowardojo said last week.

President Susilo Bambang Yudhoyono last month raised domestic fuel prices for the first time since 2008 to cut subsidy costs and boost confidence in the rupiah. Consumer prices rose 5.9 percent in June from a year earlier, from 5.47 percent in May.

The central bank raised the benchmark rate by half a percentage point because it sees price gains approaching the upper end of its 7.2 percent-to-7.8 percent range for 2013 and as transportation costs rose “too steeply” after the fuel subsidy cuts, Martowardojo said today. Before the fuel price increase, it had expected inflation to be between 3.5 percent and 5.5 percent.

Transport Costs

Transportation costs surged 5.48 percent in June from a year earlier, after gaining 1.64 percent in May, the statistics bureau said July 1.

“Bank Indonesia is in serious inflation-fighting mode,” said Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong. “Maintaining positive sentiment and shoring up market confidence is as important, if not more, for the case of Indonesia.”

Indonesia joins Brazil in raising borrowing costs as emerging markets take steps to stem capital outflows sparked by concern the U.S. Federal Reserve will start to scale back liquidity injections. Still, others in Asia are choosing to keep rates unchanged with Thailand and South Korea staying on hold this week.

Gains in housing costs are also contributing to Indonesian inflation, prompting Martowardojo to announce policies to quell rising property prices. Bank Indonesia will impose stricter loan-to-value rules for some mortgages effective September, he said today.

Slower Growth

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 central bank has lowered its economic growth forecast for 2013 to about 5.8 percent to 6.2 percent, from a previous estimate of as much as 6.6 percent.

The International Monetary Fund this month cut its global growth forecast for 2013 as a U.S. expansion weakens, China’s economy levels off and Europe’s recession deepens.

The central bank’s decision to raise the rate it pays lenders on overnight deposits, also known as the Fasbi, by 50 basis points was predicted by one analyst in a separate Bloomberg survey, with nine others expecting a 25 basis-point increase.

“After a back-to-back rate hike, the likelihood is for BI to take a pause in the August meeting and be ready to act again if inflation does not peak by then,” Societe Generale’s Chong said.

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