Indonesia's central bank (Bank Indonesia) decided to raise its benchmark interest rate (BI rate) by 50 basis points to 7.0 percent on Thursday (29/08) in order to support the weakening rupiah amid slowing global economic growth. The rupiah has been on a long losing streak and has fallen to its lowest level against the US dollar in four years. The BI rate had already been raised in June and July from a historically low 5.75 percent to 6.50 percent. Today, an extra meeting was scheduled to discuss policy measures.
Inflation has surged in Indonesia after the government decided to increase the price of subsidized fuels. Other factors that intensified the pace of inflation recently were weak government policies regarding import quotas, the new school year and festivities related to Ramadan and Idul Fitri. According to Finance minister Chatib Basri, inflation at the end of the 2013 may reach 9.3 percent (year on year), which is significantly higher than previous assumptions. Currently, Indonesia's inflation rate is 8.61 percent (July, YoY).
As the Federal Reserve is planning to end its money flow (quantitative easing), investors have been pulling money out of emerging markets, including Indonesia. Apart from the inflation-issue, investors are also highly concerned about Indonesia's current account deficit (USD $9.8 billion in the second quarter of 2013).
Market players seem to agree to a seven percent BI rate as a good middle way between curbing inflation and supporting economic growth. Today (29/08), Indonesia's main stock index was up 1.92 percent to 4,103.59 points.
On Wednesday (28/08), ten-year government bond yields rose to 8.7956 according to the Indonesia Bond Pricing Agency.