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Bank Indonesia Lifts Key Rate Unexpectedly

Indonesia’s central bank unexpectedly raised its key interest rate by a quarter-point on Thursday in order to curb the fall in the domestic currency rupiah after retaining the policy rate unchanged for eight consecutive sessions.

The Board of Governors of Bank Indonesia, led by Governor Perry Warjiyo, decided to lift the seven-day reverse repo rate by 25 basis points to 6.00 percent.

The Bank Indonesia had hiked the benchmark rate by 250 basis points in the latest tightening cycle that began in August 2022.

The deposit facility rate was raised to 5.25 percent and the lending facility rate to 6.75 percent.

The interest rate action is initiated to stabilize the currency and to mitigate the impact on imported goods inflation so that inflation remains within the 2-4 percent this year and 1.5-3.5 percent next year, the central bank said in a statement.

The economy is projected to grow in the range of 4.5-5.3 percent this year and expand further next year.

There is a good chance that this rate hike will be a case of “one and done”, Capital Economics’ economist Gareth Leather said.

The economist said the US bond yields are set to drop back over the coming months and this should alleviate some of the downward pressure on the rupiah.

Moreover, with inflation very low amid struggling growth, policymakers will be wary about tightening policy too aggressively, Leather added.

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