The central bank of Indonesia (Bank Indonesia) has raised its benchmark interest rate (BI rate) and deposit facility rate (Fasbi) by 25 basis points to 7.25 percent and 5.50 percent respectively on Thursday (12/09). It is the fourth time since June that Bank Indonesia raised the interest rate. Previously, it maintained a historic low BI rate of 5.75 percent for 16 months. The increase is one of the measures taken to control inflation, stabilize the rupiah exchange rate and to ensure that the current account deficit is managed to a sustainable level.
Indonesia's inflation has accelerated to 8.79 percent in August (YoY) after prices of subsidized fuel prices were raised in late June 2013. Several other factors that contributed to high inflation in Indonesia are the Ramadan and Idul Fitri celebrations in August, shortages of certain food products on Indonesian markets due to badly-handled import quotas, the beginning of the new school year, and imported inflation due to the depreciation of the rupiah. The rupiah has been weakening since the Federal Reserve announced to be planning to end its quantitative easing program, causing the U.S. 10-year Treasury yield to surge. To make matters worse, Indonesia has been hit by a record high USD $9.8 billion current account deficit in the second quarter of 2013, equivalent to 4.4 percent of the country's GDP, as exports have been week, while imports of fuel and capital goods were strong. Investors have been highly concerned about this widening deficit. One way to overcome the current account deficit is to limit economic growth. Through tightening its monetary policy, Bank Indonesia thus aims to curb domestic consumption. Domestic consumption accounts for about 55 percent of Indonesia's economic growth.
Later today (12/09), Indonesia Investments will publish Bank Indonesia's press release in the financial columns section. This press release will elaborate on the motives and context behind the rate hike.