BI ups rate to defend rupiah

The central bank has once again moved in to help the beleaguered rupiah -- while at the same time trying to ward off a looming inflation hike -- as it raised its interest rate to a double- digit level.

Bank Indonesia (BI) governor Burhanuddin Abdullah announced on Tuesday the central bank has increased its benchmark BI Rate again by 50 basis points -- or half a percent -- to 10 percent, following a 75-point hike to 9.5 percent last week as part of its monetary policy package to help bolster the rupiah.

The rate hike was also aimed at helping dampen inflation, which BI said could rise to 9 percent by the end of the year, ahead of the government's plan to hike domestic fuel prices again, and the ongoing uncertainty of global oil prices.

"Inflationary pressures will rise if the fuel price hike happens," he said.

The government is forecasting 8 percent inflation and a 6 percent economic growth this year.

To further limit the rupiah's volatility, BI will also tighten local forex trading, by prohibiting banks from margin trading the rupiah against all other currencies, as well as conducting market intervention through one- to seven-day swap transaction instruments as of Sept. 15.

Meanwhile, starting on Oct. 1, BI will also require banks to better maintain their net open position -- the difference between foreign currency assets and liabilities -- and offer three- to six-month swap facilities for hedging purposes.

The rupiah has come under pressure as soaring oil prices have pushed the state budget to the brink of a fiscal instability, shaking investor confidence in the currency.

The rupiah closed at Rp 10,360 a dollar on Tuesday, down 0.4 percent from its finish the previous day. -- JP