4 reasons behind Bank Indonesia's unexpected rate hike
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Bank Indonesia (BI) on Tuesday unexpectedly hiked the benchmark rate by 25 basis points to 7.50 per cent.
Nomura Securities cited four main reasons why the central bank acted against market expectation.
1) To address a current account deficit that could be worse than expected (data will be released on Thursday)
2) Private consumption growth was stronger than the central bank's expectation in the third quarter of 2013, which implies the economy is not slowing down sufficiently to ease the current account gap
3) To narrow the negative real interest rate levels. This is consistent with the central bank's statement, which indicated that the rate move was aimed at meeting the inflation target (3.5-5.5 per cent for 2014).
4) To maintain the currency stability ahead of the possible earlier timing of the US Federal Reserve's tapering.
