Bank Indonesia hiked interest rates to 7.25%

It's the fourth increase since June.

According to BBVA Research, its monthly policy meeting today, Bank Indonesia unexpectedly hiked interest rates, for a fourth time since June. The move brings the benchmark policy rate to 7.25%, a cumulative increase of 150bps since June, in response to high inflation (8.8% in August, well above the official target of 3.5-5.5%) and downward currency pressures -- the rupiah has depreciated against the USD by 15% since early June, although it has stabilized in recent days at around 11,000 per USD.

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Meanwhile, the central bank in the Philippines (BPS) kept rates on hold at 3.50% in view of its benign assessment of the inflation outlook.

The divergent moves reflect Indonesia’s relative vulnerability to macro instability following an administered fuel price increase in June, widening current account deficit, and capital outflows on expectations of QE Fed tapering.

We expect financial markets to stabilize in Indonesia on the back of BI’s rate hikes and government efforts to improve the investment climate.

But growth during the remainder of 2013 will surely take a hit, and will likely fall below our projection of 5.9%.

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