Indonesia's central bank raised its benchmark BI rate by 50 basis points, strengthened its currency intervention and liquidity management operations, and signed a $12 billion swap agreement with the Bank of Japan to bolster its defenses in light of the outflow of capital, pressure on the rupiah currency and high inflationary expectations.
Bank Indonesia (BI), which already raised rates in June and July to stem the decline in the rupiah and prevent a buildup in inflationary expectations, said it still believes it has enough foreign exchange reserves to face the pressures on its balance of payments but it is in discussion with other Asian central banks about stronger cooperation as global economic uncertainty and pressure requires "good anticipation to strengthen the policy mix response and resilience in the face of external shocks, including an adequate cushion of foreign exchange reserves."
The central bank added that it "was ready to take further measures to strengthen its monetary policy instruments and the macroprudential policy mix if required."
Pressure on Indonesia's rupiah currency is also continuing, the BI said, partly from the general pressure on almost all emerging market currencies but also because of the high current account deficit and inflation, the BI said.
"Bank Indonesia assesses that the level of today's exchange rate reflects the fundamentals as well as supports increased exports and decreased imports as part of the process of adjusting the current account deficit," the bank said.
Based on yesterday's closing exchange rate of 10.45 rupiah to the U.S. dollar, the rupiah has deprecated by 11.9 percent from the end of December last year.
In addition to raising the BI rate by 50 basis points to 7.0 percent - the central bank has now raised the rate by 125 basis points this year - the central bank raised the interest rate on its lending facility by 25 basis points to 7.0 percent and the interest rate on its deposit facility by 50 basis points to 5.25 percent.
The BI said the increase in interest rates should help it further control inflation expectations and "mitigate the risk of a possible influence of the rupiah deprecation on inflation and vice versa." It added that the new measures should also reduce the current account deficit to a sustainable level.
The move by the BI came at an extraordinary meeting of its board as global investors prepare for next month's possible reduction in asset purchases by the U.S. Federal Reserve by withdrawing funds from Indonesia, along with other emerging markets, putting pressure on its currency and raising questions over the sustainability of its currency account deficit.
The BI already held a policy board meeting on Aug. 15, when it kept rates steady, and was first scheduled to meet on Sept. 12. It announced today's board meeting on Tuesday.
Other moves announced by the BI to strengthen the management of market liquidity and financial stability include auctions of one and three months certificates of deposit, which can be traded in the interbank market management and used as banks' reserve requirements, shorten the holding period of BI certificates to one month from six months.
The BI will also expand its use of foreign exchange swaps as hedging instruments and was planning to tighten its loan-to-value rules on certain types of mortgages and apartments in the near future.
To strengthen the rupiah and meet the needs for foreign exchange, the BI said it would start daily auctions and offer overnight funds, in addition to the current auctions of 7, 14 and 30 days. It also expanded the use of foreign exchange swaps as hedging instruments.
In a lengthy statement, the BI said the pressure on its balance of payments continues though the intensity is beginning to decline. Based on preliminary data, Indonesia'scurrent account deficit in the second quarter rose to $9.850 billion in the second quarter from 5.27 billion in the first quarter.
The BI said the second quarter deficit was equal to 4.4 percent of Gross Domestic Product and was expected to decline to 3.4 percent in the third quarter. The high deficit is mainly to high oil imports while the capital account should improve from foreign direct investment and portfolio investments in government securities though there have been outflows of portfolio investments from the stock market.
Indonesia's inflation rate, which jumped to 8.61 percent in July from 5.9 percent in June, is expected to remain high, the BI said, though decline in August and return to more normal levels from September.
By the end of the year inflation is projected to be between 9.0-9.8 percent, well in excess of the central bank's target of 4.5 percent, plus/minus one percentage point.
Indonesia's economy has been slowing down this year in sync with the global slowdown, with its GDP expanding by an annual 5.81 percent in the second quarter from 6.03 percent in the first quarter, and the BI repeated that it expects a further slowing in the second half of this year, with growth for the full year to be in the lower limits of the range of forecasts of 5.8-6.2 percent.