(Bloomberg) -- Bank Indonesia defied expectations and raised its benchmark interest rate to a record high to help guide the rupiah below the psychological level of 16,000 against the dollar by year-end.

The central bank increased the BI-Rate by 25 basis points to 6.25% on Wednesday, a move predicted by only 11 of 41 economists surveyed by Bloomberg. The rest had expected no change. Global uncertainty has flared up with the dollar’s resurgence and conflict in the Middle East, requiring an “anticipatory, forward-looking, and preemptive” policy response, Governor Perry Warjiyo said in a virtual briefing.

The surprise hike could set the tone for other emerging Asian central banks that are having to ramp up their currency defenses while waiting for the Federal Reserve to begin its own easing pivot. The pressure to act is more acute for Bank Indonesia whose prime mandate includes rupiah stability. It is also wary of knock-on effects to inflation as the nation relies on imports for food and fuel.

The benchmark rate now sits at its highest level since it was introduced in 2016 to shore up the local currency that’s lost nearly 5% against the dollar this year. Bank Indonesia also pledged to step up its FX interventions, as well as let money-market rates rise to lure more foreign inflows.

“We believe the rupiah will remain stable around 16,200 in the second quarter, and strengthen toward an average of 16,000 in the third quarter, and further to an average of 15,800 in the fourth quarter with the BI policy responses that have been delivered,” Warjiyo said in a rare detailed guidance of the central bank’s currency outlook.

The rupiah closed 0.4% stronger against the dollar on Wednesday for its third straight day of gains. The move trims the rupiah’s slump this month to 1.9%, the third worst performer in Asia as it succumbs to dollar strength spurred by expectations the Fed may delay cutting rates as well as high seasonal demand for the greenback.

Delayed Cuts

To further bolster his hawkish stance, Warjiyo made no mention of monetary easing on Wednesday, a shift in tone after previously saying that rate cuts would be considered after the mid-year. Bank Indonesia revised its forecast for the Fed’s rate path, seeing the first 25-basis point rate cut in December, if not early 2025, much delayed from its earlier assessment of 75 basis points starting the second semester. That could imply that its own pivot may also have to wait.

While price growth has been within the central bank’s 1.5%-3.5% goal this year, a weaker rupiah risks fanning inflation by making imports more expensive. The central bank is confident headline inflation will stay within target this year and the next as the harvest season helps cool food prices, the governor said.

BI has made it “clear that supporting the currency would remain its key priority over the coming months,” according to Capital Economics. This hike, however, shouldn’t be read as a signal for the start of a prolonged hiking cycle, given inflation is very low and growth is struggling, it said.

When asked if the central bank sees room for further rate hikes, Deputy Governor Aida Budiman said that policymakers have already taken a “bold policy step” to maintain stability. “We do not resort to one instrument only. There are other tools ready to be deployed,” she said during a call with investors after Wednesday’s rate decision.

That echoes sentiments from the camp of President-elect Prabowo Subianto, which said before the announcement that further tightening is not necessary and risks stifling Southeast Asia’s largest economy.

Lending Stimulus

Warjiyo was still sanguine about the economic outlook, retaining the 2024 growth forecast at 4.7%-5.5%. Despite higher borrowing costs, credit growth is also seen at 10%-12% this year. Lending incentives will also be expanded starting June 1 to unleash about 115 trillion rupiah ($7 billion) in liquidity for banks.

Foreign funds have sold a net $583 million in Indonesian government bonds so far this month. That’s spurred Bank Indonesia to intervene “more boldly” in the spot and derivatives markets to moderate sharp swings in the exchange rate. It’s also offered hefty premiums on its rupiah securities to lure more foreign inflows. Beyond the central bank, the government has also ordered state-owned enterprises to refrain from making large dollar purchases and told exporters to repatriate their earnings.

--With assistance from Tomoko Sato and Matthew Burgess.

(Recasts throughout with more detail from central bank briefing)

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