Indonesia c.bank raises key rate to 5.75 pct, plans…

JAKARTA, Sept 27 (Reuters) – Indonesia’s central bank raised its benchmark interest rate for the fifth time since mid-May on Thursday and unveiled plans for an instrument aimed at helping the rupiah by encouraging foreign investors to do their currency hedging onshore.

Hours after the Federal Reserve hiked U.S. interest rates for the third time this year, Bank Indonesia (BI) increased its benchmark interest rate by 25 basis points (bps) to 5.75 percent.

The extension of BI’s tightening cycle takes the increase in the benchmark to 150 bps points since mid-May, when Indonesia suffered capital outflows as U.S. Treasury yields rose.

All but two of 25 analysts in a Reuters poll had expected a hike on Thursday, and 20 predicted a 25 bps increase.

This year, the rupiah has shed about 9 percent against the dollar to trade near its weakest levels since the 1997-98 Asian financial crisis.

After Thursday’s announcement, the currency weakened slightly to 14,910 a dollar, from 14,905.

Next week, BI will issue rules as guidelines for onshore non-deliverable forward transactions of rupiah against a number of currencies to provide an alternative hedging product.

BI wants foreign investors or Indonesian companies with foreign currency liabilities to use the onshore market instead of offshore NDFs, where future USD/IDR rates are currently weaker than in onshore forward market.

BI Governor Perry Warjiyo said that to strengthen the rupiah’s stability, Thursday’s hike is “supported by a policy to allow domestic nondeliverable forward transactions to deepen the financial market as well as offer an alternative hedging instrument for banks and corporations.”

Capital Economics said that Thursday’s increase showed that Indonesia’s tightening cycle was “not over yet”.

Warjiyo said BI’s stance remains hawkish.

To defend the rupiah this year, BI has spent billions in currency intervention, while the government has raised import tariffs, widened biodiesel use and delayed big infrastructure projects to reduce imports.

Some analysts praised these measure, although others warned they will be costly because of stifling growth momentum.

BI continued to see 2018 economic growth at a range of 5.0-5.4 percent and 5.1-5.5 percent next year, Warjiyo said.

Indonesia’s rate hikes, unlike those in the Philippines, are not rooted in inflation concerns. August’s annual inflation rate was 3.20 percent, comfortably inside BI’s target range and Warjiyo said the rate will stay within target in 2018 and 2019. (Reporting by Nilufar Rizki and Maikel Jefriando; Additional reporting by Gayatri Suroyo and Fransiska Nangoy; Editing by Richard Borsuk)