Indonesia’s Rupiah Trades Near Two-Week High After Rate Rise

Indonesia’s rupiah traded 0.6 percent from a two-week high after the central bank raised borrowing costs in an extraordinary meeting following President Joko Widodo’s cut in fuel subsidies.

Bank Indonesia increased the reference rate to 7.75 percent from 7.5 percent yesterday, the first change this year. Inflation may quicken to 7 percent in the next few months after Widodo increased the price of subsidized gasoline and diesel to free up state funds, according to Nomura Holdings Inc. and Australia & New Zealand Banking Group Ltd.

“For BI, the imperative to anchor inflation expectations was paramount,” said Leong Sook Mei, the Southeast Asia head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. Strength in the dollar “is unbeatable for now” given expectations that the Federal Reserve will raise rates, she said.

The rupiah was little changed at 12,148 per dollar in Jakarta after rising as much as 0.4 percent earlier to 12,098, according to prices from local banks compiled by Bloomberg. The currency touched 12,078 yesterday, the highest level since Oct. 31. One-month non-deliverable forwards traded offshore fell 0.5 percent to 12,191 per dollar, 0.4 percent weaker than the onshore rate, data compiled by Bloomberg show. The contracts strengthened 1.1 percent yesterday.

The central bank said yesterday it’s aiming for inflation of 3 percent to 5 percent next year. Consumer-price increases accelerated to a four-month high of 4.83 percent in October.

“Bank Indonesia’s decision to hike rates underscores its attempt to guard inflation credibility,” Bank of America Merrill Lynch Singapore-based analysts Chua Hak Bin and Claudio Piron wrote in a report yesterday. “It should be rupiah-positive and supportive for back-end bonds.”

The yield on the 8.375 percent government notes due March 2024 was steady at 7.91 percent, according to the Inter Dealer Market Association. The two-year yield fell one basis point, or 0.01 percentage point, to 7.44 percent.

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