Indonesia raises interest rate to 7 percent

JAKARTA, Indonesia (AP) Indonesia's central bank unexpectedly raised its benchmark interest rate by half a percentage point Thursday to 7 percent, hoping to stem a slide in the local currency and keep the country's current account deficit at a sustainable level.

Bank Indonesia spokesman Difi A. Johansyah said the rate hike is expected to strengthen control of inflation and mitigate the risk of further rupiah depreciation.

The rupiah has lost nearly 9 percent against the U.S. dollar so far this year and is at its lowest level in four years.

Emerging economies including India, Indonesia and Brazil have suffered an exodus of short-term foreign investment capital, often known as "hot money," as prospects for developed economies including the U.S. and Europe improve.

In Asia, Indonesia and India have been the hardest hit because of weaknesses in their economies such as high inflation and current account deficits that reflect high imports of essentials such as oil.

Bank Indonesia also signed a currency swap agreement with the Bank of Japan worth $ 12 billion to take effect on Aug. 31, under which the two central banks could borrow from each other's foreign-exchange reserves.

The Indonesian central bank said it has sufficient foreign exchange reserves but the swap arrangement will be an additional backstop to cope with global economic uncertainty and swings in financial markets.