Indonesia Raises Rate More Than Forecast to 6.5% on Inflation

Indonesia Raises Rate More Than Forecast to 6.5% on Inflation

Bank Indonesia raised its key interest rate more than forecast to bolster a weakening currency and ease inflation pressures after the government increased fuel prices last month.

The central bank boosted the reference rate by 50 basis points to 6.5 percent, Governor Agus Martowardojo said in Jakarta today. The outcome was predicted by three of 19 economists surveyed by Bloomberg News, with the majority expecting a 25 basis-point increase. It also boosted the deposit facility rate to 4.75 percent from 4.25 percent.Indonesia in June became the region’s first major economy to boost rates this year, as policy makers sought to shore up one of Asia’s worst performing currencies in the past 12 months and cool inflation expectations. Price gains are expected to peak in July, Martowardojo said last week, citing seasonal factors including the observance of the fasting month of Ramadan in the world’s most populous Muslim nation.

”Bank Indonesia is really concerned about curbing inflation expectations,” David Sumual, chief economist at PT Bank Central Asia, said before the decision. “By raising the key rate, inflation won’t be higher than BI’s expectations for this year.”

The rupiah dropped 0.2 percent to 9,983 per dollar as of 2:20 p.m. in Jakarta, prices compiled by Bloomberg from local banks show. It has fallen about 6 percent in the past 12 months, the worst performer among 11 Asian currencies after the yen and the Indian rupee.

Foreign Reserves

Indonesia’s foreign-exchange reserves fell to $98.1 billion last month from $105.15 billion in May, the central bank said as it intervened to support the rupiah. The levels are still adequate to stabilize the currency, Martowardojo said last week.

President Susilo Bambang Yudhoyono last month raised domestic fuel prices for the first time since 2008 to cut subsidy costs and boost confidence in the rupiah. Consumer prices rose 5.9 percent in June from a year earlier, and Martowardojo said yesterday inflation may reach the upper end of its estimated 7.2 percent-to-7.8 percent range for 2013.

Indonesia’s decision to raise rates contrasts with those around the region. Thailand and South Korea held rates this week, while economists forecast Malaysia will do the same later today. The International Monetary Fund this month cut its global growth forecast for 2013 as a U.S. expansion weakens, China’s economy levels off and Europe’s recession deepens.

Gains in housing costs are also contributing to Indonesian inflation, prompting Martowardojo to say that the central bank is planning policies to quell rising property prices. Bank Indonesia will impose stricter loan-to-value rules for some mortgages, he said today.

The Indonesian economy grew 6.02 percent in the first three months of 2013 from a year ago, after expanding 6.11 percent the previous quarter. Earlier this month, the central bank lowered its economic growth forecast for 2013 to about 5.8 percent to 6.2 percent, from a previous estimate of as much as 6.6 percent.

To contact the reporter on this story Novrida Manurung in Jakarta at nmanurung@bloomberg.net