Indonesia's central bank hiked its key interest rate Thursday as Southeast Asia's biggest economy seeks to halt a further slide in the rupiah. Bank Indonesia's board of governors boosted the policy rate to 4.5 percent from 4.25 percent, a move predicted by a majority of analysts.
The rupiah has plunged 3.5 percent to past 14,000 to the dollar since the start of the year and is now at its weakest since 2015. "The policy is part of the Bank Indonesia policy mix for maintaining economic stability in the midst of continuing uncertainty in world finance markets and a decrease in global liquidity," the central bank said in a statement.
"Bank Indonesia also continues its effort to stabilise the rupiah exchange rate." The decision to hike rates - the first time since 2014 - underscores the fragility of the Indonesian currency, which has been hammered by surging US Treasury yields and rising oil prices. While the move may offer respite to the depreciating currency, it could stifle efforts to boost sluggish growth rates.
President Joko Widodo came to power in 2014 on a pledge to boost annual growth to seven percent, but the commodities-driven economy has remained stuck in the 5.0 percent range.
In a bid to accelerate growth the central bank repeatedly slashed rates - including an unexpected drop to 4.5 percent from 4.75 percent in August - and Widodo announced a series of economic stimulus packages. Looking ahead, the outlook for monetary policy would likely depend on the performance of the currency, economists said.
"We are forecasting further weakness in the rupiah between now and the end of 2018," said Gareth Leather, Asia economist from Capital Economics. "If we are right, then further rate hikes are likely before the end of the year."
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