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Indonesia tries to tame market as bets grow that central bank will hike rates on Wednesday

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Bank Indonesia said that it will hold another meeting on May 30 to discuss economic and monetary conditions. On May 17 it raised its benchmark interest rate for the first time since November 2014.

Jakarta

INDONESIA'S top policymakers sought to shore up confidence in South-east Asia's biggest economy, as bets grow that the central bank will raise interest rates for the second time in two weeks at an out-of-cycle policy meeting on Wednesday.

Perry Warjiyo, sworn in as governor last week, said on Monday that it was not an "emergency meeting", but the rupiah jumped to a two-week high on hopes central bank actions will relieve persistent pressure on the country's financial markets.

Alongside other emerging markets, Indonesia has seen an outflow of funds as US assets become more attractive due to rising interest rates.

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Bank Indonesia (BI) on May 17 raised its benchmark interest rate for the first time since November 2014 in a bid to bolster the fragile rupiah and stem capital outflows. On Friday, it said it will hold an additional meeting on May 30 to discuss economic and monetary conditions.

"The dynamics offshore happened so quickly and market perceptions were formed so quickly that there is a tendency that some became irrational," Mr Warjiyo told a briefing attended by other policymakers. "These dynamics need to be responded to immediately to stabilise things."

He said Wednesday's meeting will look ahead to the Federal Reserve's June policy review, which is expected to raise US rates again.

BI's next scheduled meeting is June 27-28, after the Eid al-Fitr holidays following the Muslim fasting month of Ramadan. This period is also a time of peak spending in the world's biggest Muslim-majority country, adding to pressure on policymakers to maintain stability.

At Monday's news conference, Darmin Nasution, the coordinating minister of economics, said regulators will prioritise stability in the short-term and economic growth in the medium-term.

"We are not in a crisis. These are to strengthen things, to respond to dynamics," said Mr Nasution.

Other Indonesian markets also rallied on Monday, with the benchmark 10-year government bond yield falling to 7.223 per cent at noon from 7.545 per cent on Friday. Jakarta's main stock index rose 1.3 per cent.

Last week, Mr Warjiyo promised to use interest rate policy to stabilise the rupiah in the near-term and to be "more pre-emptive" and ahead of the curve on monetary settings.

The rupiah has been among the worst performers among Asian currencies this year, losing about 3 per cent of its value, as investors slash their holdings in emerging markets in response to rising US Treasury yields.

DBS said that weaker sentiment on emerging market debt had pushed several central banks including Argentina and Turkey to take a more hawkish stance to control capital outflow risks and maintain financial markets' stability. "Against this backdrop, further BI rate hikes may be needed, with the next one possibly as early as this week," it said.

Economists at Citi, Morgan Stanley, Bank Danamon and Trimegah Securities also predicted a rate rise, while Natixis said it expected the central bank to be guided by a 2013 precedent and take decisive moves.

The last time BI held an extraordinary meeting was the November 2014 one that raised its main policy rate, to tackle rising inflation expectations.

"Indonesia faces the possibility of having to bring down its current account deficit at the expense of GDP growth, as in 2013," Citi economist Helmi Arman said in a note.

When Indonesia last faced such market volatility in 2013, during the so-called "taper tantrum", policymakers took a series of measures to restore calm.

These included BI raising rates by 175 basis points, allowing the exchange rate to depreciate and preparing bilateral swap agreements, while the government let in more imports to maintain domestic prices.

Policymakers have already repeated some of these measures.

Mr Warjiyo said the "dual intervention" that BI is currently doing in the currency and bond markets is similar to 2013.

BI has also announced an intention to broaden swap agreements with Japan to bolster its "second line of defence".

Meanwhile, the government has allowed more food imports to keep prices low and cap energy prices with larger subsidies. Officials are also working on improving tax incentives to attract investment.

Finance Minister Sri Mulyani Indrawati said the government would improve debt management and governance of state firms, especially those working on infrastructure.

Many state firms dominating large swathes of the economy have seen debt levels balloon.

However, officials say the economy is now in a much better condition compared to 2013, with larger foreign-exchange reserves, greater fiscal space and a smaller current account deficit.

"We are ready to take any kind of policy to support Indonesia's economy," Ms Indrawati said, adding that if short-term measures mean slightly lower growth, "then that consequence has to be accepted". REUTERS

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