Indonesia raises interest rates to support sliding rupiah

Jakarta: Indonesia’s central bank has unexpectedly raised its benchmark interest rate in a bid to support the sliding rupiah, which is trading near four-year lows as currencies across Asia come under pressure from a strong dollar and expectations of a delay in US rate cuts.

Bank Indonesia on Wednesday raised its seven-day reverse repo rate 0.25 percentage points to 6.25 per cent, the highest since the bank adopted the instrument as its benchmark rate in 2016. Most economists polled by Bloomberg had expected the central bank to hold rates.

The rupiah has shed nearly 5 per cent of its value against the dollar this year as the rising dollar has dented emerging market currencies in the region.

The rate rise was intended to strengthen the rupiah in response to “worsening global risks” and represented a “pre-emptive and forward looking” step to ensure inflation remains within the central bank’s target range of 1.5 to 3.5 per cent, Bank Indonesia governor Perry Warjiyo said in a briefing. Indonesia’s inflation rate rose to 3.05 per cent in March year on year, the fastest rate since August.

Warjiyo added that a “strong policy response” was needed due to rising uncertainties around the US Federal Reserve’s rate outlook and escalating tensions in the Middle East.The rupiah strengthened 0.4 per cent against the dollar to 16,155 on Wednesday.

The rate rise move came amid growing market expectations that the Fed will delay expected rate cuts this year in response to higher US inflation and resilient economic performance.

The Indonesian central bank intervened in foreign exchange markets last week to support the rupiah after the currency crossed the 16,000 mark against the dollar. The government also asked state-owned companies to refrain from purchasing the dollar in large amounts.