Weak rupiah forces Indonesia to raise interest rates

An announcement from Indonesia’s central bank Tuesday indicated that it would raise interest rates in order to shore up the rupiah, which hit a three-year low earlier in the week.

It did not say when this raise in rates would come, but it would come next week on Wednesday with the next auction of the Sertifikat Bank of Indonesia. The current interest rate is 7.7 percent.

Indonesia is still attempting to recover from the Asian financial crisis of 1997-98, which it was the hardest-hit economy in the area. The country’s economy has remained behind all the other economies in the region in its recovery.

The current dip in the value of the rupiah has fueled fears of inflation that would further harm recovery. Indonesia’s economy grew by 5.1 percent last year and has been projected to grow by 5.5 to 6 percent this year, but the devaluation of the rupiah and rising inflation are a threat to that growth.

Continuing weakness in the rupiah could also make it more difficult for Indonesian companies to service offshore debt and contribute to further inflation, which could lead to social unrest among the country’s poorer citizens.

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