Indonesia lifts rates to cap inflation after fuel hike

Indonesia's central bank on Thursday hiked its key interest rate for a second consecutive month as it seeks to keep inflation in check after a huge rise in the price of fuel.

The decision by Bank Indonesia to lift rates by 50 basis points to 6.50 percent came as a surprise, with most economists expecting a 0.25 percentage point rise. It had announced a 25 point rise in June.

The move will also provide much-needed support to the flagging rupiah, which has tumbled against the dollar as foreign investors retrench in expectations the US Federal Reserve will wind down its easy-money stimulus programme.

The government raised the price of petrol by 44 percent and diesel by 22 percent last month, the first hike since 2008 as Southeast Asia's top economy seeks to reduce crippling subsidies.

But the measure, which sparked violent protests across the country, pushed inflation to 5.90 percent on-year last month owing to the higher cost of transporting goods and public transport.

The central bank said Thursday it now expected inflation to come in at an average of between 7.2 and 7.8 percent for the whole of 2013.

But bank governor Agus Martowardojo sought to allay concerns, saying that "Bank Indonesia estimates that the impact of the fuel price hike is temporary, about three months, and it will hit a peak in July".

The bank also increased the rate it pays lenders for overnight deposits by 50 basis points to 4.75 percent, a move aimed at reducing money supply, which should also slow the pace of inflation.

The hike in June was aimed principally at shoring up the rupiah after the currency fell to multi-year lows owing to huge outflows of capital.

Concern had been growing among international investors about the failure to cut the fuel subsidies, which are blamed for a widening current account deficit, as demand for fuel increases and the government is hit with ever bigger bills.

Analysts said the moves to tighten monetary policy were necessary but came at a bad time as economic growth slows.

Indonesia's economy expanded by 6.02 percent in the first quarter, the slowest pace in more than two years.

And the central bank recently revised down its prediction for growth this year to a range of 5.8 to 6.2 percent, from an earlier estimate of 6.2 to 6.6 percent.

"The sharp fuel price rise and associated interest rate tightening measures, which may well not have finished yet, is coming at a time when the economy is softening," said economist Robert Prior-Wandesforde from Credit-Suisse.

"In our view, the market remains far too optimistic about Indonesia's economic outlook."

The central bank also announced measures Thursday to cool the property market amid warnings it could be overheating, including stopping lenders from giving out loans for downpayments on purchases of houses and apartments.

The new measures will be effective from September.