Indonesia’s central bank raises interest rates by 50 basis points to avoid inflation risks

Indonesia’s central bank raises interest rates by 50 basis points to avoid inflation risks

Written by Gayatri Suryo and Stefano Suleiman

JAKARTA (Reuters) – Indonesia’s central bank raised interest rates more than expected on Thursday as it sought to curb inflation after the government raised subsidized fuel prices earlier this month, while also supporting the rupiah.

Bank Indonesia (BI) raised the 7-day reverse repo rate by 50 basis points to 4.25%. Of the 30 economists polled by Reuters, 27 expected a move of 25 basis points, while the remaining three bet on a 50 basis point rate hike.

The rate decision comes after the government raised fuel prices by about 30% earlier this month, a move that BI Governor Perry Wargio said would push headline inflation to a peak at just above 6% and core inflation at 4.6% by the end of the year, before pulling back. .

“The decision to raise interest rates was a proactive, precautionary, and forward-looking measure to lower inflation expectations and ensure core inflation returns to its target range … by the second half of 2023,” Wargio told a virtual news release. conspiracy.

He said the rate hike should guide the rupiah exchange rate again to reflect its core value, adding that the currency should strengthen due to Indonesia’s strong exports.

Graphic: Indonesia Politics Price https://graphics.reuters.com/INDONESIA-ECONOMY/RATES/dwpkrxxanvm/chart.png

The rupee, along with other Asian currencies, came under pressure on Thursday after the Federal Reserve raised US interest rates by 75 basis points.

Before the price was announced, the rupee was trading at 15.040 per dollar, its weakest since May 2020. It pared its losses to close at 15,015, down 0.13% on the day.

To help solidify the rupee, BI has also brought back penalties for natural resource exporters who do not receive their profits through local banks, Deputy Governor Jodha Agung said.

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Indonesia’s central bank raised interest rates last month for the first time since 2018 amid mounting price pressures. Annual inflation was 4.69% in August, and Wargio said it will accelerate to 5.89% this month due to the immediate impact of higher fuel prices.

“Our inflation is relatively under control compared to other countries, and of course the need to aggressively raise interest rates is not necessary in Indonesia,” Wargio said.

The target range for BI inflation is 2% to 4% for 2022 and 2023.

Graphic: Indonesia’s inflation rates https://graphics.reuters.com/INDONESIA-ECONOMY/RATES/znvnewwzepl/chart.png

Radhika Rao, chief economist at Bank Indonesia, said, β€œThe Bank of Indonesia has increased the rate hike to solidify inflationary expectations after the increase in fuel subsidies and also to support financial markets while the hawkish Federal Reserve is pressing the regional currency package, including That rupee.” DBS Bank Singapore.

Elsewhere in the region, central banks in Taiwan and the Philippines raised interest rates on Thursday.

Willian Wiranto, an economist at OCBC, said: β€œToday’s larger-than-usual move portends further price hikes in the coming months and we may not see business intelligence resting until rates hit 5%, to give it the necessary buffer by the end of this year.”

BI maintained its view that Southeast Asia’s largest economy continues to recover from the impact of the COVID-19 pandemic and that GDP growth for 2022 will be biased toward the upper end of its projected range of 4.5%-5.3%.

Indonesia’s economy grew 5.44% year-on-year in the second quarter, more than expected, boosted by exports and private consumption after the easing of COVID-19 restrictions.

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