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Indonesia hikes key rate amid wider current account deficit, rupiah weakness

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Indonesia hikes key rate amid wider current account deficit, rupiah weakness

The Indonesian central bank raised its benchmark interest rate for the fourth time this year in a bid to curb the country's widening current account deficit and defend the rupiah after a collapse in the Turkish lira caused jitters in emerging markets.

Bank Indonesia hiked the seven-day reverse repo rate by 25 basis points to 5.50%. It also raised the deposit facility and lending facility rates by 25 basis points to 4.75% and 6.25%, respectively. The move "is consistent with ongoing efforts to maintain the attractiveness of the domestic financial markets and manage the current account deficit within an acceptable threshold," the central bank said in an Aug. 15 statement.

Indonesia's current account deficit rose to $8.0 billion, or 3.0% of GDP, in the second quarter from $5.7 billion, or 2.2% of GDP, in the prior three-month period on the back of an import surge of raw materials, capital goods and consumer goods.

On the external front, the central bank said it will monitor potential spillovers from economic shocks in Turkey, where a recent slide in the lira triggered fears of contagion in emerging markets.

The rupiah was down 0.71% against the U.S. dollar as of 7:43 a.m. ET. The currency has declined almost 7% so far this year.

The central bank's monetary tightening and government measures could help stabilize the rupiah, said Joey Cuyegkeng, Philippines senior economist at ING.

"We believe that [Bank Indonesia] could continue with its tightening cycle until some stability is achieved. Higher interest rates will eventually moderate domestic demand and imports. Import substitution efforts by the government ... may help moderate growth and stabilize the [rupiah]," Cuyegkeng said. "But these measures will take time to work through the economy, which brings the burden of short-term stabilization onto the central bank."