Bank Indonesia signage is displayed at the Indonesian central bank’s headquarters in Jakarta. Indonesia raised its benchmark reference rate to 7.5% yesterday, in a surprise move to help shrink a worryingly large deficit in the current account.

Reuters

Jakarta

Indonesia’s central bank raised its benchmark reference rate to 7.5% yesterday, in a surprise move to help shrink a worryingly large deficit in the current account.

The move will help bolster the fragile rupiah, Asia’s worst performing currency this year, from capital outflow pressures ahead of a winding down in US monetary stimulus.

The decision, which comes as inflation has started to stabilise, follows comments a day earlier from senior deputy governor Mirza Adityaswara saying the central bank would keep a “tight bias” on its rate policy because of high imports by Southeast Asia’s biggest economy.

The central bank also increased the deposit facility rate, or Fasbi, by 25 basis points to 5.75%.

“This is to manage the current account deficit going forward,” a Bank Indonesia spokesman told reporters.

Today, Indonesia will announce its third quarter current account balance which a Reuters poll of economists predicts will be in deficit at 3.7% of GDP. That is narrower than a April-June gap of 4.4% of GDP, which may relieve pressure on the ailing rupiah, down more than 17% against the dollar so far this year.

The deficit was a main reason Indonesia’s markets were savaged by portfolio funds, forcing the central bank to raise interest rates in several steps to defend the rupiah and implement other fiscal and monetary measures.

The delay in the US Federal Reserve’s tapering of monetary stimulus has now given Indonesian policymakers some breathing space to further improve fundamentals and boost market confidence.

The government has predicted a deficit of 3.3-3.5% of GDP in the third quarter that could fall further by year-end.

“It is a surprise. They are trying to crunch domestic demand to curb import growth and bring the current account back to balance,” said Jonathan Cavenagh, senior FX strategist with Westpac in Singapore.

“It should be a positive for the rupiah, but not sure how long it will be sustained for. Foreign holdings of Indonesian bonds are already back at +4% above the peak level we saw in mid-May. So the market is well and truly back to neutral if not slightly overweight on Indonesian bonds,” he added.

The central bank has lifted its key reference rate by 175 basis points since June to boost confidence in its financial markets after a major sell-off in Indonesian assets.

Indonesia posted the slackest growth in nearly 4 years in the third quarter at 5.6%, as the central bank attempts to steer a broad domestic slowdown to improve its trade balance and narrow the current-account gap.

October annual inflation eased to 8.32% from 8.4% the previous month while the trade balance swung back into deficit in September, with a $660mn gap compared with a revised $70mn surplus in August.

The vast majority of analysts in a Reuters poll had projected the reference rate would be held at 7.25%, as recent government’s data showed the economy weakened while inflation eased.

The rupiah strengthened to 11,530 per dollar after the central bank decision. Before the rate increases, it was around 11,610 versus Monday’s close of 11,555.