Indonesia unexpectedly hikes rates to boost rupiah

Indonesia's central bank on Thursday unexpectedly hiked its main interest rate for the second time in two weeks in an aggressive move aimed at shoring up the plummeting rupiah.

Bank Indonesia has now lifted rates 150 basis points since June in a bid to stop investors fleeing Southeast Asia's top economy on speculation the United States will reduce its stimulus programme.

Emerging markets have been hit hard by fears that the Federal Reserve may taper off its bond-buying programme, with the situation in Indonesia compounded by its own serious domestic problems.

These include widening current account and trade deficits, slowing growth and rocketing inflation.

On Thursday Bank Indonesia surprised economists, who had expected the bank to stand pat, by increasing its benchmark rate 25 basis points to 7.25 per cent.

The move came after the central bank hiked rates half a percentage point on August 29 at an unscheduled meeting as the stock market plummeted and the rupiah sank.

On Thursday it also hiked the rate it pays lenders for overnight deposits by 25 basis points to 5.50 percent.

Officials hope this move will encourage lenders to leave their rupiah with the central bank, thereby reducing money supply and in theory stopping the rupiah from weakening further.

As well as helping the rupiah, the bank is also hoping to tackle inflation, which hit a four-year high after a hike in fuel prices.

Analysts said that Indonesia appeared to be in a worse state than some of its emerging market peers, whose currencies had recently won back ground.

"In the last few days... the rupiah has continued to weaken, even though most other emerging market currencies have rebounded," Gareth Leather of Capital Economics said in a note.

The rupiah was trading at 11,309 to the dollar on Thursday. It has fallen around 16 percent against the dollar this year.

But Leather warned that Indonesia's economy, which is already slowing, would likely be dragged further down by the hikes.

"Aggressive monetary tightening is likely to cause the economy to slow," he added.