The central bank of Indonesia predictably raised interest rates on Friday as inflation fears began to spook foreign investors out of the market.

Bank Indonesia hiked its reference rate by 25 basis points to 6.75 per cent. Analysts said the move was predicted and that more hikes are on the way.

Despite its continued dovish rhetoric, BI for some time has been setting the stage for an increase in the reference rate, according to Vishnu Varathan, Asia Economist at research firm Capital Economics.

We continue to expect that BI will lift rates further and that the moves from now on will be frequent, Varathan wrote in a note.
Though the Indonesian stock markets will feel the pinch of the rate hikes in the short term, the Bank of Indonesia move will prove good for the stocks in the long run, according to Varathan.

Jakarta stocks may well stay under stress for a while as the markets fret over whether tighter policies will derail the upswing. We believe these fears will prove to be unfounded and that BI’s decisive move will end up being cheered. Jakarta stocks will probably be lower than current levels in three months’ time.

Inflation