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Indonesia's central bank unexpectedly raises rates

Sha Ying | CNBC

The Indonesian central bank unexpectedly raised interest rates at Tuesday's policy meeting as it sought to manage the country's current account deficit.

Bank Indonesia hiked the overnight lending rate by 25 basis points to 7.50 percent. It also increased the overnight deposit facility rate, also known as the FASBI, by 25 basis points to 5.75 percent.

Indonesia's current account deficit, which has been a source of concern for investors, has been exacerbated by declines in the country's currency and stock market when concerns of a tapering of the Federal Reserve's asset-purchase program hit emerging markets earlier this year.

In the second quarter, Indonesia's current account deficit stood at $9.8 billion, or 4.4 percent of gross domestic product (GDP). Following Tuesday's policy decision the central bank said that the current account deficit eased to $8.4 billion in the third quarter.

Tuesday's decision came as a surprise to investors; in a Reuters poll, 15 of 17 analysts projected the central bank would keep interest rates on hold. Including this week's decision the central bank has raised the overnight lending rate by 175 basis points since June.

The move also follows Indonesia's lackluster third-quarter economic growth; GDP growth slowed to 5.62 percent on year in the third quarter from 5.81 percent in the second quarter. While in line with expectations, the economy grew at the slowest rate in four years in the third quarter due to weak exports and slowing consumption.

Following the decision, the U.S. dollar fell to around 11,530 against the Indonesian rupiah from around 11,610 before the decision.

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