November 15, 2018 / 9:46 AM / in a month

UPDATE 2-Indonesia c.bank surprises with 6th rate hike to shore up rupiah

* C.bank unexpectedly hikes benchmark 25 bps to 6.00 pct

* BI has raised key rate six times in 2018, by 175 bps

* BI gives banks more liquidity management flexibility

* Governor: We anticipate rising global interest rates

* Many analysts expect further hikes by BI (Adds details, quotes)

By Gayatri Suroyo and Maikel Jefriando

JAKARTA, Nov 15 (Reuters) - Indonesia’s central bank on Thursday surprisingly raised its benchmark interest rate for the sixth time this year, as policymakers struggle to reduce imports and lower the country’s yawning current-account deficit.

Bank Indonesia (BI) raised its 7-day reverse repurchase rate by 25 basis points to 6.00 percent, Governor Perry Warjiyo told a news conference, a move predicted by only two of 19 analysts in a Reuters poll. The rest expected a hold.

The key rate has now been hiked six times by a total of 175 basis points since May, as BI tried to slow capital outflows triggered by rising U.S. rates and aimed to put a floor under the fragile rupiah.

The currency strengthened as much as 0.9 percent after the rate decision.

Less than an hour after BI’s hike, the Philippines raised its benchmark 25 bps to 4.75 percent, making its total for the year also 175 bps. The two central banks have been far and away Asia’s most hawkish this year, though Manila’s main problem has been high inflation and Jakarta is the current account.

By hiking now, BI moved one month before the next Federal Reserve meeting, which is expected to raise U.S. rates for a fourth time this year, and made October’s pause in a tightening cycle a brief one.

The BI governor said its rate hike was intended to ensure the attractiveness of Indonesia’s financial assets “and to anticipate rising global interest rates in the next couple of months”.

MORE HIKES EXPECTED

Many analysts see more Indonesian hikes, as more U.S. ones are anticipated.

OCBC in Singapore sees at least three hikes in 2019 and ING said expects a minimum of 50 bps more “over the policy horizon”.

David Sumual, chief economist of PT Bank Central Asia, also sees more, noting that in December, if the Fed hikes at its meeting just before the year’s last for Indonesia, “BI will follow suit”.

The central bank is “trying to balance out strong domestic demand that has resulted in the imbalance on external account and thus the rupiah,” Bank Danamon economist Wisnu Wardana said.

If there are more hikes, then BI will have tightened more than it did after the Fed’s 2013 “taper tantrum”.

BI, trying to manage the impact of its tightening on the economy, coupled its rate hike with a relaxation on liquidity management rules.

This will give banks more flexibility to manage funds they must park at BI, which Warjiyo said would address uneven distribution of liquidity among banks.

Banks will still need to maintain a 6.5 percent of savings as required reserve at BI, but the portion for daily deposit will be 3.5 percent. This means 3 percentage points of flexibility in reserve requirement, up from 2 percent now.

ENOUGH LIQUIDITY?

BI has repeatedly said it would ensure the market has enough liquidity. Satria Sambijantoro, an economist with Bahana Securities, said the rate hikes so far were felt strongly by small banks whose loan-to-deposit ratios have breached 100 percent.

The central bank said 2018 economic growth will likely be 5.1 percent, versus 2017’s 5.07 percent.

The rupiah, the second worst performer among emerging Asian currencies this year, strengthened sharply at the beginning of November as global sentiment improved and Indonesia reported slightly stronger than expected third quarter economic growth.

But it is still trading near levels not seen since the Asian economic crisis.

Warjiyo said BI’s rate hikes and the government’s measures to curb imports are aimed at cutting the current account gap to 2.5 percent of GDP in 2019. The deficit will likely be under 3 percent this year, he said.

Trade data earlier on Thursday showed those measures, including higher import tariffs, delays of infrastructure projects and a wider use of biodiesel, did not have an immediate impact on imports. Indonesia posted a larger-than-expected $1.82 billion trade deficit in October due to surging imports.

Additional reporting by Fransiska Nangoy and Tabita Diela; Editing by Richard Borsuk

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