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BI RATE - JAKARTA. Indonesia's central bank raised its benchmark interest rate for the first time since 2018 on Tuesday, stepping up monetary tightening to fight rising inflation and stabilise the rupiah.
Southeast Asia's largest economy has made a steady recovery from pandemic disruptions and benefitted from strong global demand for commodities. The central bank now expects economic growth to come in near the top end rather than lower end of its 4.5%-5.3% forecast in 2022.
Bank Indonesia (BI) hiked the seven-day reverse repurchase rate by 25 basis points (bps) to 3.75%.
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Most analysts surveyed by Reuters had expected BI to stand pat, with a significant minority - 11 of 27 economists - predicting a rate hike. The last time BI raised its key rate was in November, 2018.
"The decision to increase interest rates is a pre-emptive and forward-looking step to mitigate the risk of rising core inflation and inflation expectations," Governor Perry Warjiyo told a news conference, noting "very high" food inflation and rising prices of non-subsidised fuels.
The move took into account a strengthening domestic economy and was also targeted at stabilising the rupiah, Warjiyo said, though he did not indicate if more rate rises were likely in the coming months.
The rupiah erased earlier losses and posted a 0.34% gain by the close on Tuesday. The stock market extended gains.
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Indonesia's government is considering raising subsidised fuel prices, which would intensify pressure on inflation that is already at a seven-year high of 4.94% in July.
Warjiyo said headline inflation was forecast at 5.24% this year, compared with below 5% previously - well above BI's 2% to 4% target. He said core inflation could reach 4.15% at the end of 2022.
Asked about the potential fuel price hike, Warjiyo said BI would update its inflation outlook in line with the government's subsidy policy.
Radhika Rao, senior economist at DBS Bank, said the rate rise was to front-run a potential increase in subsidised fuel prices as well as to anchor inflationary expectations.
"As the central bank sets the ball rolling, we retain our expectations of at least 50 bp more hikes by end-2022."
The absence of forward guidance on rates meant "BI is unlikely to follow-up with aggressive interest-rate hikes," said Bahana Securities economist Satria Sambijantoro, predicting another 25 bps increase this year at most.
Complementing the rate decision, Warjiyo said BI will conduct what it calls "operation twist" in which it will sell short tenured bonds and buy bonds with medium to long maturities.
The objective of the operation was to attract portfolio investment and strengthen the rupiah, while lowering borrowing costs for the government, he said.
BI cut rates by 150 basis points and injected billions of dollars into the financial system during the COVID-19 pandemic. It has begun to tighten liquidity this year.
