Indonesia's surprise decision to hike interest rates on Thursday - becoming the first Asian central bank to do so since 2011 - was a pre-emptive move against inflation as the local currency weakens, said the deputy governor of the country's central bank.
"The decision to raise the interest rate was because we see inflationary pressure rising recently and with that, it is proper for us to pre-emptively address inflation by raising our policy rate by 25 basis points," Perry Warjiyo, Deputy Governor Bank Indonesia told CNBC Asia's "The Call" on Friday.
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According to the central bank, inflation could spike to close to 8 percent this year from the current 5.47 percent. Plus a depreciating currency, the rupiah, which fell to a four-year low this week to less than 10,000 against the dollar, adds to inflationary pressures.
The hike puts Indonesia's benchmark interest rate at 6 percent and followed a series of measures this week like a pledge to supply U.S. dollars and buy government bonds to support the rupiah, which is under pressure like other emerging market currencies.
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Jitters that the U.S. Federal Reserve will start to unwind monetary stimulus for the U.S. economy soon has dealt a blow to emerging market assets, including currencies, bonds and equities and central banks have intervened to lessen the impact of outflows.
Sha Ying | CNBC
Warjiyo said that the latest decision to hike rates was further reinforcement of the bank's commitment to contain the depreciating rupiah.
While Citi Research expects two more 25 basis point hikes by Bank Indonesia in July and August, Robert Prior-Wandesforde, director of Asia economics at Credit Suisse, thinks future action by the central bank depends on whether the currency settles down.
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"[The currency's movement] hinges partly on factors outside of the central bank's control - for example what happens in the U.S.," Prior-Wandesforde said in a note.
- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu
