UPDATE 2-Indonesia raises key rate to aid rupiah, flags chance of more hikes

(Adds quotes, details, background)

* Benchmark is raised by 25 bps for the 2nd time in two weeks

* C.bank gov sees room for more hikes 'in a measured way'

* Wednesday's policy meeting was first extra one since 2014

* Analyst: New governor is 'very serious' about stability

JAKARTA, May 30 (Reuters) - Indonesia's central bank raised its benchmark interest rate for the second time in two weeks on Wednesday and flagged more possible hikes as it escalated a battle to boost the fragile rupiah and contain capital outflows.

Bank Indonesia's new governor, Perry Warjiyo, pledged more action to promote financial and economic stability to bolster Indonesian assets amid an emerging market sell-off.

The central bank "will continue to calibrate global and domestic market developments to utilize room for further rate hikes in a measured way," Warjiyo told reporters after the board of governors at a special meeting lifted the key rate by 25 basis points to 4.75 percent.

On May 25, one day after being sworn-in for a five-year term, Warjiyo called Wednesday's off-cycle meeting. On May 17, BI raised its key rate by 25 basis points to shore up the rupiah, then trading at its weakest since October 2015.

Warjiyo said the additional meeting was needed as a "pre-emptive, front-loading and ahead of the curve step" in response to expectations of higher U.S. interest rates, which could push U.S. Treasury yields higher.

Rahul Bajoria, economist in Singapore for Barclays, said the two hikes in two weeks "very forcefully signals to the market that the new governor is very serious about maintaining financial stability, and the institution is willing to be pre-emptive in managing risks that are emanating largely from external drivers."


Stephen Innes, head of Asia-Pacific currency trading at OANDA, said Wednesday's decision showed "currency first and nothing else really matters."

The governor said that BI will discuss loosening its "macroprudential" rules at its meeting in late June, and new ones should be released "soon." He earlier said BI is looking at housing mortgages, but he did not give any details.

In 2016 and 2017, BI cut its benchmark rate by a total of 200 bps in a bid to boost sluggish lending and economic growth.

Warjiyo said that at the end of 2018, he expects loan growth to reach 12 percent from a year earlier. During much of 2017 and until April, annual loan growth was in single-digits. April's growth rate was 8.9 percent.

With loan growth low and consumption weak, Indonesia's annual economic growth has been stuck at about 5 percent.

On Monday, Finance Minister Sri Mulyani Indrawati said "We are ready to take any kind of policy to support Indonesia's economy," adding that if short-term measures mean slightly lower growth, "then that consequence has to be accepted."

The government has a 2018 growth target of 5.4 percent. BI said on Wednesday it still expects expansion of 5.2 percent, better than last year's 5.07 percent.


The rupiah, one of the worst performers among Asian currencies this year, barely moved following the rate announcement. It was trading at about 13,985 per dollar at the time it was made.

Indrawati and other senior officials on Monday sought to shore up confidence in Southeast Asia's biggest economy at a time Indonesia, like other emerging markets, has seen an outflow of funds as U.S. assets become more attractive due to rising interest rates.

Key economic indicators are sound, Warjiyo said, noting that the annual inflation rate is seen at 3.6 percent at the end of 2018, while the current account deficit is expected to below 2.5 percent of GDP, which BI considered "healthy."

Harry Su, managing director at financial research firm Samuel International, said BI "is now doing more proactive and forward-looking policy, particularly with regard to a possible higher current account deficit, as well as inflationary pressure stemming from the current higher oil price environment."

All but one of 18 analysts in a Reuters Poll expected BI to raise the key rate on Wednesday.

(Reporting by Nilufar Rizki, Maikel Jefriando, Gayatri Suroyo and Tabita Diela; Editing by Richard Borsuk)

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