Indonesia’s central bank considers third rate in a month to stem capital flight
Indonesia’s central bank will meet today to decide on whether to hike interest rates for a third time in a month.
The majority of analysts expect an increase of another 25 basis points to 5%. It follows similar increases on May 30 and May 18, the first hikes in three years.
The central bank hopes an interest rate hike will persuade foreign investors to keep their money in Indonesia, stemming capital flight. However, it also risks restraining economic growth by increasing the cost of borrowing—and therefore investing—discouraging economic activity in some sectors.
Central bankers are likely to perceive the risk of capital flight as the higher priority—especially in light of relatively stable growth figures of 5%. Capital flight was a major cause of the 1997-98 Asian Financial Crisis and the resulting mass protests toppled the Suharto regime.
Increased capital flight means less demand for the Indonesian rupiah, and could devalue the currency, resulting in an increase in the costs of living as imported goods become more expensive.
President Joko Widodo, who is seeking reelection next April, will be hoping the central bank’s moves can fend off any such rises in the cost of living.
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