Indonesia’s central bank hiked its key interest rate Tuesday for the first time in nearly four years to combat rising inflation stoked by the Covid-19 pandemic and war in Ukraine.
Bank Indonesia raised the policy rate to 3.75 from 3.5 percent, a move that went against the majority of analysts’ predictions.
Its two other main rates were also raised by 25 basis points.
Rates were hiked for the first time since 2018 to defend against accelerating inflation, Bank Indonesia governor Perry Warjiyo said, with Russia’s invasion driving up global energy and food prices and pushing millions into poverty around the world.
“The decision to raise the rates was taken as a pre-emptive and forward-looking step to mitigate risks from the hikes in core inflation and expectations of inflation because of the increase in non-subsidised fuel prices and volatile food inflation,” Warjiyo told reporters in an online press briefing.
The move came as Jakarta considers raising subsidised fuel prices, a policy that was expected to further stoke inflation already at a seven-year high of 4.94 percent in July and sitting above the central bank’s target range of between 2 and 4 percent.
With rising energy and food commodity prices, Warjiyo said the central bank expected inflation would go above its target range in 2022 and 2023.
President Joko Widodo came to power in 2014 on a pledge to boost annual growth to seven percent, but the commodities-driven economy has remained stuck in the 5.0 percent range and has fallen below that after the onset of the coronavirus pandemic in early 2020.
Looking ahead, the outlook for monetary policy is likely more tightening due to the continuing uncertainty in world markets, economists said.
“The hawkish commentary from the (Bank Indonesia) press conference increases the risk that the bank will tighten policy further this year,” said Gareth Leather, Asia economist from Capital Economics.