Business News

Published: Thursday August 29, 2013 MYT 5:30:00 PM
Updated: Thursday August 29, 2013 MYT 5:31:51 PM

Indonesia hikes interest rates to defend its falling currency

JAKARTA: Indonesia's central bank increased both its benchmark interest rate and its overnight deposit facility rate by 50 basis points on Thursday, in its latest attempt to defend the rupiah, which is Asia's second worst performing currency this year.

The country has been among the hardest hit by the retreat from emerging market currencies and stocks over the past two weeks, driven by worries that the U.S. Federal Reserve will soon start closing the tap on cheap money that has been helping drive up their economies.

As some analysts expected, Bank Indonesia hiked its benchmark reference rate to 7.0 percent, and the rate it pays banks for overnight deposits, known as FASBI, to 5.25 percent.

"BI's decision is meant to be (1) a signal that they are still on top of the situation to try and manage inflationary expectations in the country, (2) a bid to engineer a slowdown in the domestic economy to curb import growth, and (3) an attempt to boost U.S. dollar liquidity onshore," said Gundy Cahyadi, economist at OCBC Bank in Singapore.

Indonesia, like other emerging markets, is trying to cope with large outflows as investors sell their currencies, stocks and bonds.

On Wednesday, Brazil raised its benchmark interest rate to a 16-month high of 9 percent, maintaining the pace of monetary tightening to fight inflation and rebuild investors' confidence in Latin America's largest economy.

Indonesia's moves on Thursday follow increases in June and July in the benchmark and FASBI rates by a total of 75 basis points.

Then, at a meeting on Aug. 15, the central bank held rates and changed some regulations to seek to contain commercial lending. Economists suggested BI steered from hikes then as it did not want to act to reduce the country's growth rate, which in the second quarter slipped below 6 percent for the first time since 2010.

However, the June and July hikes were not enough, given dwindling confidence in Indonesia's economic outlook because of slowing growth, surging inflation and - to many the most troubling - a widening current-account deficit now at one of its biggest levels on record.

The rupiah, which was up slightly before Thursday's announcement and flat in the immediate aftermath, has slumped about 11.3 percent this year and is down almost 5 percent since Indonesia announced on Aug. 16 that its current account deficit rose sharply to 4.4 percent of gross domestic product during the second quarter.

FLIGHT FROM SHARES

It is the second worst performing currency in Asia this year after the Indian rupee. The concerns that have hit emerging markets in general have been compounded this week by expectations of Western military action in Syria, which has added encouragement to investors to head for shelter in dollar assets.

The past two weeks has seen flight from Indonesian shares. At one point on Wednesday, the main index was down more than 18 from an Aug. 14 peak. Through Wednesday - on which stocks rose 1.5 percent - the index was down 6.7 percent this year.

The government last week announced a series of emergency fiscal and monetary measures but they have done little to dispel the short-term investor gloom over Indonesia though a number of economists say that the for emerging market star should start to shine again in a few months.

The central bank is also struggling to calm inflation, driven to 4-1/2 year years by a sharp increase in fuel prices in late June and repeated administrative stumbles over the supply of basic foods from garlic to beef and which has boosted the main CPI index. - Reuters

Tags / Keywords: Business News, Investing

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