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Indonesia’s central bank on Tuesday raised its key interest rate for the first time in nearly 4 years to combat emerging inflation driven by the Covid-19 pandemic and the war in Ukraine.
Bank Indonesia raised the key interest rate from 3. 5% to 3. 75, a move that goes against most analysts’ forecasts.
Its two main rates also rose by 25 basis points.
Rates were raised for the first time since 2018 to hedge against accelerating inflation, Bank Indonesia Governor Perry Warjiyo said, as Russia’s invasion lifted global energy and food costs and plunged millions of people into poverty around the world.
“The resolution to raise rates was taken as a preventive and forward-looking measure to mitigate dangers similar to increases in core inflation and inflation expectations due to emerging costs of unsubsidized fuel and volatile food inflation,” Warjiyo told reporters at an online news conference.
The move came as Jakarta plans to raise subsidized fuel prices, a policy that is expected to further fuel inflation that is already at a seven-year high of 4. 94% in July and above the central bank’s diversity target of 2 to 4%.
With rising energy and food costs, Warjiyo said the central bank expects inflation to exceed its target in 2022 and 2023.
President Joko Widodo went so far as to force a promise in 2014 to increase the annual expansion to 7%, but the commodity-based economy remained stagnant in the 5. 0% range and fell after the coronavirus pandemic began in early 2020.
Going forward, the financial policy outlook is likely to tighten more due to continued uncertainty in global markets, economists said.
“The aggressive remark at (Bank Indonesia’s) press conference raises the threat that the bank will further tighten its policy this year,” said Gareth Leather, Asia economist at Capital Economics.
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