Bank Indonesia Raises Rates a Third Time to Defend the Rupiah

Bank Indonesia raised its benchmark interest rate by 25 basis points to 5.75 percent, stepping up its defense of the rupiah as the currency fell to its weakest level in months. The move was the third increase in roughly four weeks, totaling 100 basis points, after a surprise half-point rise in May and an unscheduled quarter-point increase on June 9.

Bank Indonesia Governor Perry Warjiyo described the decision as a pre-emptive step to strengthen the rupiah's stability amid persistently high global uncertainty and to keep inflation within the government's target range of 2.5 percent, plus or minus one percentage point.

The pressure originates in the United States. With Federal Reserve officials signaling that interest rates may stay higher for longer, the dollar has strengthened, and emerging-market central banks are being forced to raise their own rates to slow capital outflows and prevent their currencies from weakening further. It is a familiar pattern in which the cost of defending the currency is slower domestic growth.