JAKARTA, June 13 Indonesia became the first central bank in Asia to raise its policy interest rate since 2011, the strongest sign yet in regional emerging economies of the stress being wrought by the global markets rout.
The Indonesian central bank's move was unexpected but followed a flurry of measures this week, including a pledge to supply dollars and buy government bonds, to defend the rupiah currency after it stumbled to a four-year low beyond 10,000 per dollar.
"I think they want to send a clear message to markets that they will act on rupiah weakness," said Sean Yokota, head of Asia strategy at Scandinavian Bank SEB in Singapore.
The selloff in emerging markets since mid-May has been driven by a surge in U.S. Treasury yields in anticipation of the eventual tapering off of the Federal Reserve's stimulus programme.
After years of flooding markets with cash, the Fed's eventual policy tightening would be the most significant change in markets since the global financial crisis in 2008.
Emerging market assets are likely to stay under pressure at least until the Fed's meeting next Tuesday and Wednesday, when investors will be looking for more clarity on policy.
The rout has pushed India's rupee to a record low this week against the dollar. Brazil's real and the South African rand hit four-year lows.
Analysts say these economies need foreign funding to bridge deficits in their current accounts or have heavy short-term debt obligations, making them vulnerable to capital flight risk.
"Foreign investors are rushing out of the door to secure whatever gains they still have," said April Lee-Tan, research head at COL Financial in Manila, after Asian markets suffered another rout on Thursday.
Japan's Nikkei average plunged more than 6 percent, responding to fears that the Bank of Japan is doing too little to try to calm volatile markets.
MSCI's broadest index of Asia-Pacific shares outside Japan tumbled more than 2 percent to its lowest level since September and for its biggest daily drop in three weeks.
European shares fell heavily in opening trading.
Indonesia raised its policy rate to 6.00 percent from 5.75 percent, the first increase since February 2011. On Tuesday it boosted its overnight deposit facility rate, paid out to banks that park overnight cash with the central bank, by 25 basis points to 4.25 percent.
"We will supply dollars in large amounts to stabilise the rupiah," Deputy Central Bank Governor Perry Warjiyo said on Wednesday, hours after the authority had also said it was ready to buy government bonds in the secondary market. Foreign investors own a third of outstanding government bonds.
Indonesia has been an emerging-market favourite in recent years, securing an investment-grade credit rating and seeing its stock market reach record highs as recently as May.
But the country's first trade deficit last year in living memory put pressure on the current account shortfall and a growing fuel subsidy bill has raised worries about the government's ability to contain its fiscal deficit.
Some analysts said the central bank's action may not be enough to contain pressure on the rupiah.
"The usual short-term reprieve - of a day or two - will allow marginal appreciation of rupiah," said Suresh Kumar Ramanathan, head of regional interest rate and FX strategy at CIMB Investment Bank in Kuala Lumpur.
"But it does not alter the view that markets have currently, that is, capital reversal to economies with stronger growth trajectory and economies with a clear signal of currency appreciation, which is the U.S. economy and the U.S. dollar."
Analysts said they would expect emerging market central banks - backed by foreign exchange reserves of more than $7 trillion - to use heavy currency intervention to deal with the market turbulence.
But interest rate cuts are off the agenda, said Singapore-based Credit Suisse economist Robert Prior-Wandesforde, because that would act to further undermine regional currencies.
Financial markets had speculated that both Thailand and India were poised to cut rates to provide further support to economic growth.
The Reserve Bank of India is due to review policy on Monday and its currency is already at a record low. So although economic growth is struggling at around its weakest pace in a decade, the central bank is unlikely to risk further undermining confidence by reducing interest rates, analysts say.
Brazil has been tearing down the capital barriers originally put in place when it was hit with a flood of cash after the global financial crisis.
With its falling currency threatening to add to inflationary pressures, Brazil said on Wednesday it will scrap a financial transactions tax levied on some U.S. dollar futures operations. In late May, it stepped up its tightening campaign by raising its key interest rate to 8.00 percent from 7.5 percent.
Turkey's central bank reviews policy on Tuesday and Governor Erdem Basci left the door open to a possible tightening of policy. Just last month, it cut all its key rates by 50 basis points to leave its overnight borrowing rate at 3.5 percent, its benchmark repo rate at 4.5 percent and its lending rate at 6.5 percent.
"We will discuss an increase in the upper band of the interest rate corridor," Basci said on Wednesday. "But as of now there does not appear to be any such need."