Indonesia surprises by hiking interest rates to seven-year high

JAKARTA (AFP): Indonesia’s central bank hiked interest rates Wednesday to their highest for seven years, an unexpected move to boost the rupiah, which continues to weaken against the dollar despite several interventions in currency markets.

Economists had predicted Bank Indonesia to hold the seven-day reverse repurchase rate at six percent but it instead raised it 25 basis points to 6.25 percent, a level not seen since 2016.

Its two other main rates were also raised by 25 basis points.

“The interest rate increase is to strengthen the rupiah’s exchange rate stability against the possibility of worsening global risks,” Bank Indonesia governor Perry Warjiyo told a news conference Wednesday.

Since exiting the Covid-19 pandemic, Bank Indonesia has joined other global central banks in tightening monetary policy to fight soaring inflation.

The surge in prices has been driven in part by Russia’s invasion of Ukraine, which stoked worldwide energy and food price rises, as well as supply chain snarls and pandemic-related economic issues.

Perry said the move was a “pre-emptive and forward-looking step” to ensure inflation remains within the bank’s 1.5-3.5 percent target range. It is currently at 3.05 percent.

The rupiah has outperformed regional peers against a strengthening US dollar, but it has still weakened more than five percent since the start of the year, Perry said, even after a string of interventions to support the unit.

The greenback has been boosted by fading expectations about how many times the Federal Reserve will cut borrowing costs this year as US inflation remains stubbornly above its target.

Economists said if the rupiah continued to slide, Bank Indonesia would likely tighten further.

“The central bank has been intervening in foreign exchange markets to support the currency, and we thought it would continue with this strategy rather than resume its tightening cycle,” said Gareth Leather, senior Asia economist from Capital Economics.

“In the event of further weakness in the rupiah, then more hikes are likely.”