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Indonesia Surprises With a 0.25% Rate Hike

Sha Ying | CNBC

Indonesia's central bank announced a surprise hike in its benchmark rate by 25 basis points (bps) to 6.00 percent on Thursday, in the face of growing pressure on the rupiah and concern over delays by the government in cutting costly fuel subsidies.

The decision, the first to be presided over by new governor Agus Martowardojo, came after Bank Indonesia (BI) on Tuesday night unexpectedly hiked the overnight deposit facility rate, or FASBI, in a bid to help stabilize the weakening rupiah.

On Wednesday, Deputy Governor Perry Warjiyo said BI would also supply large amount of dollars to the market and was committed to buy government bonds in the secondary market.

(Read More: We're Ready for Exit of QE Flows: Indonesia Official)

The rupiah traded at 9,865/85 per dollar, little changed immediately after the announcement.

Indonesia's stock index was at 4,617.98 at 0608 GMT.

Context

Bank Indonesia last changed its policy rate in February 2012, with a 25 basis point cut aimed at helping keep the country's annual economic growth above 6 percent.

(Read More: Flood of Easy Money Putting This Region at Risk)

Worries about domestic economic problems and global issues have put pressure on Southeast Asia's biggest economy, causing a sell-off in equity and foreign exchange markets in recent weeks.

The annual inflation rate in May fell to 5.47 percent, just inside in BI's 3.5-5.5 percent target range for the year. The core inflation eased further to 3.99 percent.

However, annual inflation this year could surge to 7.8 percent if the government hikes fuel prices by 33 percent on average.

(Read More: Where Do the World's Happiest Consumers Live?)

Forex reserves at end of May fell to $105.2 billion, as BI intervened in the market to support the rupiah.

In April, the G-20 economy posted a trade deficit of $1.6 billion after a surplus a month earlier.

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