The Central Bank of Indonesia raised its key rate on Thursday, for the second month in a row, in an attempt to curb rising inflation in Southeast Asia’s largest economy.
The Bank of Indonesia raised its rate by half a point, from 3.75% to 4.25%, while most analysts were betting on a more modest rise of a quarter of a point.
The institution had raised its key rate by a quarter of a point in August for the first time since 2018, in order to fight against a rise in consumer prices caused by the invasion of Ukraine by Russia, which is putting food prices and energy under pressure around the world.
The Indonesian government’s decision at the beginning of the month to raise the price of subsidized fuel by 30% should further worsen inflation in September, which stood at 4.69% in August over one year.
Economists predict that inflation, which has so far remained under control in Indonesia, could reach around 7% by the end of the year.
Thursday’s rate hike is a proactive, outspoken and forward-looking move to lower the inflation outlook, Bank of Indonesia Governor Perry Warjiyo said.
This increase in the key rate aims to bring inflation back to the expected range of between 2% and 4% by the end of the year.
The commodity-rich country has withstood the global economic turmoil relatively well, with gross domestic product growth forecast at 5.2% this year, after rising 3.7% last year following a recession in 2020 (-2 .1%) due to Covid-19 restrictions.
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But the archipelago’s monetary policy could be further tightened in the future to combat inflation and the pressure exerted by a strong dollar on the national currency, the rupee.
If a rate hike (Thursday) was no doubt, the magnitude was unexpected, said Gareth Leather, economist specializing in Asia for Capital Economics.
With inflation expected to rise sharply in September, and stay above forecasts until the end of 2023, further tightening is likely.