Indonesia Unexpectedly Raises Main Rate First Time Since 2008

Indonesia’s central bank unexpectedly raised its benchmark interest rate for the first time in more than two years after inflation climbed to a 21-month high.

The central bank increased its reference rate by a quarter percentage point, to 6.75 percent, Deputy Governor Halim Alamsyah told reporters today in Jakarta. The move, the first since October 2008, was predicted by only six of 22 economists. The rest forecast the measure to be kept unchanged at the lowest level since its introduction in July 2005.

The rupiah, Asia’s third-worst performing currency in the past year, erased losses after Indonesia joined Asian nations from India to Thailand and South Korea in increasing rates. Indonesia may have more room to boost rates even at the risk of attracting more currency inflows, with the rupiah having risen only 3.6 percent in the past 12 months, less than a third of the gain in the Malaysian and Singapore currencies.

“Bank Indonesia has correctly addressed that it is important to act now,” said Vishnu Varathan, a Singapore-based economist at Capital Economics (Asia) Pte. “Investors capitulating from the asset markets on fears Bank Indonesia is caught behind the curve will find assurance that it is acting to curb inflation.”

The rupiah was at 9,009 per dollar at 1:41 p.m. local time compared with 9,030 before the announcement. The Jakarta Composite Index fell 0.4 percent before it closed for lunch, when the decision was announced. It has slid 8 percent from its Dec. 9 record high as investors were concerned the central bank has fallen behind regional peers in boosting rates to slow inflation.

Regional Trend
The Reserve Bank of India on Jan. 25 raised rates for the seventh time in a year, boosting its repurchase rate by a quarter-point to 6.5 percent. Thailand’s central bank increased the one-day bond repurchase rate on Jan. 12 for the fourth time since the start of July, lifting it to 2.25 percent. The Bank of Korea raised its benchmark on Jan. 13 for the third time since the global financial crisis.

With Indonesia’s rate increase today, the Philippines is the only major Southeast Asian economies using interest rate as a policy tool that hasn’t raised its rate.

Consumer prices in Indonesia, Southeast Asia’s largest economy, rose 7.02 percent in January from a year earlier, the most since April 2009 and exceeding the 6.81 percent median forecast in a Bloomberg survey of economists. Core inflation was 4.18 percent in January, easing from 4.28 percent the previous month.

Higher Reserves
Among the steps the central bank had taken so far to control inflation was to order lenders to set aside 5 percent of their total foreign-exchange holdings as reserves from March this year, from 1 percent currently. Bank Indonesia will also reintroduce a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows.

Inflation erodes the spending power of the poor. The World Bank estimates 29 percent of Indonesians earn less than $2 a day.

Growth Target
The central bank refrained from raising rates as President Susilo Bambang Yudhoyono targeted annual average economic growth of 6.6 percent through the remainder of his term ending in 2014. Companies from PT Bank Pan Indonesia to AirAsia Bhd. are counting on rising demand in the world’s fourth-most populous nation to boost their businesses.

Indonesia’s economy grew 6.3 percent last quarter from a year earlier, accelerating from a 5.8 percent rate in the three months through September, according to the median estimate of 12 economists surveyed by Bloomberg News. The government will release fourth-quarter economic data on Feb. 7.

Indonesian stocks’ decline is a buying opportunity as the rural-based economy will benefit from rising commodity prices, Wilianto Ie, an analyst at Nomura Holdings Inc., said last month. Concerns about inflation getting out of hand due to “policy slippage” are unfounded and the slump in Indonesia stocks is a “window of opportunity,” said Mun Hon Tham, an analyst at Daiwa Securities Capital Markets Co. Source: Bloomberg