Indonesia fights Turkey contagion with surprise hike

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LOGO of Indonesia's central bank, Bank Indonesia, as seen in Jakarta, Indonesia -- REUTERS

INDONESIA’S central bank surprised most economists by raising its benchmark interest rate a fourth time since May, moving swiftly to contain the volatility sweeping across emerging markets and curb a slide in its currency.

The seven-day reverse repurchase rate was raised to 5.5% from 5.25% on Wednesday, as forecast by seven of 28 economists in a Bloomberg survey. The rest had predicted no change.

Turkey’s crisis is adding to Indonesia’s woes, dragging down a currency that’s already been hit by an emerging-market rout triggered by higher US interest rates and a stronger dollar.

Bank Indonesia has been among the most aggressive in Asia in tightening policy this year, with Governor Perry Warjiyo reiterating the central bank’s pledge to remain pro-active.

“Bank Indonesia has reaffirmed its preemptive stance with another rate hike and more are likely to come,” said Charu Chanana, an economist at Continuum Economics in Singapore. “Warjiyo is doing all it takes to regain investor confidence and a reversal of outflows will come fast once the global volatilities subside.”

Authorities are stepping up action to curb the halt in the rupiah, which is one of Asia’s worst performers this year, down almost 7% against the dollar.

President Joko Widodo ordered import curbs on Tuesday to shore up foreign reserves, which have been drained by almost $14 billion since January as the central bank stepped up intervention.

“The decision is consistent with efforts to maintain the attractiveness of domestic financial markets and control the current-account deficit so that it will still be in the safe level,” Warjiyo said. Indonesia’s current-account deficit and a relatively high foreign ownership of government bonds make the economy vulnerable to outflows. Chanana said these factors would probably keep up pressure on the currency.

Bonds rallied after the decision, with the 10-year government yield dropping to 8% from 8.03% earlier.

Central banks in emerging markets from Argentina to India have tightened monetary policy to defend their currencies and curb inflation risks. The collapse in Turkey’s lira has added to the slump in investor sentiment, prompting Argentina’s central bank to take emergency steps on Monday by hiking its benchmark rate by 5 percentage points.

Indonesia’s strengthening economy is giving confidence to policy makers, with growth accelerating to a five-year high of 5.3% last quarter. Inflation remains within the central bank’s 2.5% to 4.5% target band. — Bloomberg