Indonesia raises its reverse repo rate to 5.25%

Jakarta

INDONESIA'S central bank stepped up its policy action with a bigger-than-forecast interest rate hike - the third in six weeks - to halt a deepening slide in the currency.

The seven-day reverse repurchase rate was raised by 50 basis points to 5.25 percent on Friday, surprising all 31 economists surveyed by Bloomberg, most of whom had predicted a 25 basis-point hike.

Governor Perry Warjiyo said: "The decision to increase the interest rate is another of Bank Indonesia's pre-emptive, front-loading and ahead-of-the-curve measures to maintain the competitiveness of domestic financial markets following changes in monetary policy in a number of countries and high uncertainties in financial markets."

While inflation remains subdued and comfortably within the central bank's 2.5 per cent to 4.5 per cent target, policy makers are squarely focused on stabilising the currency amid an emerging-market sell-off sparked by rising US interest rates. The rupiah has continued to lose ground against the dollar, dropping to as low as 14,415 on Friday to take its decline this year to more than 5 per cent.

The rupiah gained as much as 0.6 per cent against the dollar after the rate decision, while the benchmark Jakarta Composite Index extended its advance to as much as 1.2 per cent. Yields on benchmark 10-year sovereign rupiah bonds fell 8 basis points to 7.82 per cent, trimming this year's rally to about 150 basis points.

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore said: "The basis-point rate hike today underscores Governor Warjiyo's seriousness to get ahead of the curve and stem the depreciation pressure on the rupiah. There should be no doubt in the market's mind about his determination to hike further if needed, to defend the rupiah."

Mr Warjiyo said the policy action is supported by intervention in the foreign exchange and bond markets to ensure sufficient liquidity. The central bank has drained US$9 billion from its stash of foreign reserves since the end of January.

The rate action may hinder economic growth, which has been stuck around 5 per cent, well below the 7 per cent targeted by President Joko Widodo when he took office. The central bank on Friday announced measures to ease loan-to-value ratios to help spur lending and support growth. BLOOMBERG