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Indonesian central bank lifts rate to stem currency slide, prepare for Fed hike

The Indonesian central bank raised its benchmark seven-day repo rate by 25 basis points to 4.75%, as expected, in an attempt to curb the decline in the country's currency amid pressure from rising U.S. interest rates and a stronger dollar, Bloomberg News reported.

The new Bank Indonesia governor Perry Warjiyo said May 30 that the rate increase, which closely follows a 25-basis-point increase on May 17, was a preemptive move ahead of an expected Federal Reserve hike in June. He added that the bank would take additional measures in an effort stabilize the battered Indonesian rupiah, according to Bloomberg.

The rupiah, which has fallen by more than 5% since January, gained 0.09% against the dollar after the rate hike was announced. Yields on 10-year Indonesian government bonds, which have climbed to as high as 7.610% this year, fell to 7.120%.

"We do not expect the hike to be quickly followed by further tightening any time soon," said Mitul Kotecha, senior emerging markets strategist at TD Securities in a note. "Should [Bank Indonesia] hike rates too quickly it could weigh on the economy, putting at risk the recent pickup in investment spending, even with some macroprudential easing in place."

Bank of Indonesia's move comes as other central banks in emerging markets such as Argentina and India face similar pressure to hike rates. The Philippine central bank lifted rates for the first time in more than three years on May 10, and is ready to take more action if needed, Bloomberg said.