Indonesia's central bank raised its benchmark interest rate by 25 basis points to 6.75 percent on Friday, citing growing inflationary pressures and surprising many in the market who had expected it to keep borrowing costs at a record low.
Eight of 15 economists polled by Reuters earlier had expected no change even after inflation raced to a 21-month high of 7.02 percent in January, but all were positive about the move, saying it was about time the central bank started tackling price pressures that have been spooking foreign investors.
The rate increase was the first for Indonesia in more than two years, leaving the Philippines as the only larger Asian economy to have kept rates unchanged since the end of the global financial crisis. Worries that Bank Indonesia was rapidly falling behind the curve in fighting price pressures had sparked a selloff in Indonesia stocks and bonds in January, though markets have appeared to stabilise in the last few weeks.
Bank Indonesia deputy governor Halim Alamsyah, emerging from Friday prayers, told reporters that policymakers decided to raise the key rate because of concerns about the effect that rising food prices were having on broader inflation. Most economists expect the bank to raise the key rate by a further 75 basis points over the course of 2011 as it normalises monetary policy.
A 16 percent annual jump in raw food prices in January drove headline inflation higher than expected and further above the central bank's end-year 4-6 percent target. The central bank has also been intervening in the foreign exchange market to stem inflation, targeting 9,000 rupiah per dollar as a benchmark to achieve its inflation target. On Friday the rupiah strengthened to 9,005 after the rate hike from 9,025, while the main stock index pared early losses.
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