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Indonesia fights Turkey contagion with surprise rate hike

[JAKARTA] 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 per cent from 5.25 per cent 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 US dollar. Bank Indonesia has been among the most aggressive in Asia in tightening policy this year, raising rates by a total of 1.25 percentage points since mid-May, with Governor Perry Warjiyo reiterating on Wednesday the central bank's pledge to remain pro-active.

"Bank Indonesia has reaffirmed its pre-emptive 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."

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Authorities are stepping up action to curb the halt in the rupiah, which is one of Asia's worst performers this year, down about 7 per cent against the US dollar. President Joko Widodo ordered import curbs on Tuesday to shore up foreign reserves, which have been drained by almost US$14 billion since January as the central bank stepped up intervention.

Outflow Risk

"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," Mr Warjiyo said.

Indonesia's current-account deficit and a relatively high foreign ownership of government bonds make the economy vulnerable to outflows. Government data earlier on Wednesday showed the trade gap widened to a five-year high of US$2 billion in July, putting pressure on the current account and the rupiah.

"Ultimately, policy makers need to address the current-account deficit, which widened in the second quarter, and today's large trade deficit for July hints of no improvement in the third quarter," said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore.

The Jakarta Composite Index reversed losses to gain 0.3 per cent as of 3.20pm in Jakarta, while the yield on the 10-year government bonds fell to 8 per cent from 8.03 per cent earlier. The rupee was down 0.2 per cent against the US dollar after initially gaining following the rate hike.

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 per cent last quarter. Inflation remains within the central bank's 2.5 per cent to 4.5 per cent target band.

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