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Economy

Turkey crisis pushes Indonesia to raise rates again

Fourth hike in five meetings prompted by carnage in emerging market assets

The Indonesian rupiah has fallen by more than 7% this year, sinking to its lowest against the dollar since 2015 on Monday.   © Reuters

JAKARTA -- Indonesia's central bank raised its key interest rate for the fourth time in five meetings, partly in response to the Turkish currency crisis that has rippled through global markets.

Bank Indonesia decided on Wednesday to raise its benchmark seven-day reverse repo rate to 5.50% from 5.25%. The central bank has raised its key interest rate in all but one meeting since May, boosting it by a combined 125 basis points as it seeks to stem the decline of the rupiah.

The hike was prompted by the global sell-off in emerging market assets as investors shun riskier assets after seeing the Turkish lira fall to a record low this week. Even so, the move was unexpected, with only six of 19 economists polled by Reuters anticipating the move.

The rupiah has fallen by more than 7% this year, sinking to its lowest against the dollar since 2015 on Monday. The currency strengthened slightly after the announcement.

"Global uncertainties are increasing due to Turkey's domestic economy vulnerability," Perry Warjiyo, the central bank governor, said at a news conference after the meeting. "Bank Indonesia keeps watching for internal factors including Fed Fund Rate, trade tension, and what's happening in Turkey and the possibility of contagious effects from the Turkish situation."

Bank Indonesia Gov. Perry Warjiyo

Gareth Leather, senior Asia economist at Capital Economics, said in a report that the decision demonstrates that the central bank's focus remains on supporting the rupiah.

"The authorities are worried about currency weakness because of the relatively high level of foreign currency debt in the country," he wrote. "Even if the crisis in Turkey starts to fade, we think a combination of rising U.S. Treasury yields and the escalating trade war between the U.S. and China, will keep the rupiah under downward pressure... for now it seems unlikely that today's rate hike will mark the last in the current cycle."

Bank Indonesia has regularly intervened in the currency market to halt the slide, but has been unable to stop the rupiah's depreciation -- a skid exacerbated by the country's persistent current-account deficit. The shortfall widened to $8 billion in the second quarter of this year, the most in nearly four years.

Indonesia also posted a trade deficit of $2 billion in July, the largest in five years. Foreign investors are also beginning to avoid the country, with direct investment falling nearly 13% in the April-June quarter -- the first contraction since at least 2010, data released on Tuesday showed.

These data "were worse than expected" and they likely played a role in the bank's decision, said David Sumual, chief economist at Bank Central Asia. Sumual expects the benchmark rate at 5.75% to 6% at the end of the year, and economic growth for the full year to be 5.2% -- marginally lower than his previous forecast.

Indonesia's President Joko Widodo has taken unconventional steps to manage the rupiah's slide. He has ordered a measure to boost consumption of locally produced palm-oil biodiesel to push out imported fuels, and is reportedly considering cutting back on his signature infrastructure projects to curb imports of construction materials.

The president on Tuesday met with cabinet ministers to discuss way to prevent the currency slide.

Finance minister Sri Mulyani Indrawati said the government will impose a 7.5% tariff on 500 consumer goods and raw materials that "have the potential for product substitution within the country."

She added that the government will make two state owned companies -- oil and gas giant Pertamina and Perusahaan Listrik Negara, the country's sole distributor of household electricity -- review the number of components they import for projects like power stations and oil rigs. She also requested that the companies postpone new projects that are yet to be sanctioned and suspend capital goods imports for six months.

President Widodo last week announced he would run for a second term as president in the April 2019 general election. A falling currency could translate into higher inflation, potentially hurting his chances of re-election.

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