| JAKARTA, June 13
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
"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
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
But interest rate cuts are off the agenda, said
Singapore-based Credit Suisse economist Robert
Prior-Wandesforde, because that would act to further undermine
Financial markets had speculated that both Thailand and
India were poised to cut rates to provide further support to
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
"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."