KONTAN.CO.ID - JAKARTA. Indonesia's central bank raised its policy rates by 50 basis points for the second month in a row on Thursday, as it sought to curb rising inflation, while trying to slow capital outflows that have weighed on the rupiah.

While core inflation was "under control", BI decided to act preemptively to curb lofty inflation expectations, bring core inflation back to target sooner and to support the rupiah, Governor Perry Warjiyo told a news conference.

Bank Indonesia (BI) hiked the benchmark 7-day reverse repurchase rate to 4.75%, in line with the expectations of 17 out of the 30 economists polled by Reuters, with the rest forecasting a smaller 25 bp hike.

"The decision to increase the interest rate is a front loaded, pre-emptive, and forward-looking measure to reduce inflation expectations which are currently too high," he said.

Warjiyo said the aim was to bring core inflation back within the 2.0%-4.0% target range in the first half rather than the third quarter of next year. He has said core inflation, currently at 3.6%, is set to pick up to 4.3% by the end of the year.

The decision was also intended to ensure the rupiah reflects its fundamental value against the U.S. dollar, which has been buoyed by aggressive Federal Reserve monetary tightening.

The rupiah has fallen 8% against the dollar so far this year but remains one of Asia's best performers, supported by Indonesia's strong commodity exports amid high global prices.

It marks the first time BI has raised rates by 50bps twice in a row since it adopted the 7-day reverse repo rate as its benchmark in 2016. With Thursday's move, BI has raised its policy rates by a total of 125 basis points since August.

Two other main policy rates were also increased by the same amount.

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GROWTH OUTLOOK

BI started tightening monetary policy later than some of its peers, as inflation had stayed benign, with some energy prices kept unchanged thanks to government subsidies.

The government raised subsidised fuel prices last month, pushing inflation to a 7-year high of 5.95% in September, but Warjiyo said the impact of the fuel price hike on food prices had not been "as big as previously anticipated".

BI stuck to its forecast that GDP will likely be at the higher end of its 4.5% to 5.3% target range this year.

Southeast Asia's largest economy grew a faster than expected 5.44% in the second quarter due to strong exports and private consumption recovery and authorities have said they expect a further acceleration in the third quarter.

"Armed with a resilient growth backdrop, focus will be on reigning in inflationary expectations, supporting financial stability as well as to widen rate differentials with the U.S.," said DBS Bank economist Radhika Rao.

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The rupiah, which dropped to hit a 2-1/2-year low earlier on Thursday, traded slightly stronger after the announcement.

Reflecting the export boom, BI revised up its current account surplus outlook for 2022 to a range of 0.4% to 1.2% of GDP, compared with August's forecast range of 0.3% surplus to 0.5% deficit.

Strong exports and improving domestic demand would also maintain Indonesia's growth momentum through to next year, Warjiyo said.

But Capital Economics analyst Gareth Leather said high inflation, rate hikes and plans to reduce 2023's fiscal deficit had clouded the outlook.

"We think the central bank will revert back to hiking rates in 25bp increments from now on," he added.

Editor: Yudho Winarto