Interest rate hike in Indonesia underscores divergence with the Philippines

JAKARTA - At its monthly policy meeting, Bank Indonesia has unexpectedly hiked interest rates for a fourth time since June, bringing the benchmark policy rate to 7.25%, a cumulative increase of 150 basis points since June. The move was 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 US dollar by 15% since early June, although stabilising in recent days at around 11,000 per US$.

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. BBVA Bank says 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 stabilise 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%,” BBVA says. www.bbvaresearch.com (ATI).