Indonesia's central bank raised its benchmark BI rate by a higher-than-expected 50 basis points to 6.5 percent and the deposit rate by 50 points to 4.75 percent to "ensure that inflation will return to its target path after the fuel price hike," but also lowered its forecast for 2013 economic growth.
Bank Indonesia already raised its rate by 25 basis points in June in a pre-emptive move to control inflation expectations, bringing this year's total rate rise to 75 basis points. The lending facility rate was held steady at 6.75 percent.
In addition to the rate hikes, BI said it would provide adequate liquidity in the foreign exchange market to maintain a stable exchange rate, introduce loan to value regulations for property and strengthen its policy coordination with the government to "minimize inflationary pressure and to maintain rupiah exchange rate stability as well as stability to the financial system so the economic growth momentum is sustained and moves toward a more sound economy."
Indonesia's government cut fuel subsidies on June 22 to reduce budget deficits and the BI had forecast this would trigger higher inflation. In June consumer prices rose by 5.9 percent, up from 5.47 percent in May, but the central bank said it expects the impact of higher fuel prices to last for around three months, peaking in July, then easing in August and returning to normal in September.
"Bank Indonesia will remain vigilant and respond with measured policy to mitigate second round effects of fuel price hikes to inflation, including strengthening policy coordination with the government," the BI said.
By 2014, the central bank expects inflation to ease to its target range of 4.5 percent, plus/minus one percentage point.
The BI cut its forecast for economic growth this year to between 5.7 and 6.2 percent, down from its previous forecast of 6.2-6.6 percent due to lower exports from weaker-than-expected global economic growth.
Economic growth in the second and third quarters is seen at 5.9 percent, but then growth should rebound in the fourth quarter and accelerate to a range of 6.4 to 6.8 percent in 2014.
"Household consumption and investment are forecast to be slightly contained as a result of deteriorating purchasing power triggered by unfavorable exports and the impact of the fuel price hike," the BI said.