(The Insider Stories) – Bank Indonesia (BI) surprised markets Thursday with its first benchmark rate hike since February 2011, the second unexpected hawkish turn in a matter of days after BI earlier raised another rate in an apparent effort to shore up the flagging rupiah.   BI hiked the key rate by 25bps to 6.0%, its first increase since February 2011. The central bank on Tuesday announced it was increasing the Fasbi overnight deposit rate, paid on deposits at BI by commercial banks, by 25bps to 4.25%. The move, which took effect Wednesday, effectively tightens liquidity in the money market. Market watchers appear to be discounting the likelihood that BI is front-loading rate hikes to head off a forecast spike in inflation when the government raises subsidized fuel prices. A 44% hike in premium gasoline prices to IDR6,500/litre and diesel prices to IDR5,500/litre is expected to be announced as early as this week. Both prices are now at IDR4,500/litre. All 19 economists surveyed by Bloomberg News expected BI to keep the rate steady. Nine economists polled by Dow Jones Newswires had expected the bank to hold its benchmark rate and to only raise it after the government raised subsidized fuel prices. “Bank Indonesia deserves a pat on the back for this,” Singapore-based Credit Suisse economist Robert Prior-Wandesforde is quoted as saying by Bloomberg. “They clearly are showing an intent to try and stabilize the currency in a stronger way than I think all of us anticipated.” Jakarta-based OCBC economist Gundy Cahyadi is quoted by Dow Jones as saying the rate move "is clearly directed at boosting confidence in the rupiah, especially noting that the central bank is indeed concerned about growth prospects." "Following this week's rate moves, we expect another 25 basis point rate hike in the BI rate to be delivered in the next session, and probably a total of another 50 basis points of hikes in the Fasbi before the year-end, before the central bank pauses.” The rupiah was down 0.2% at IDR9,883 to the U.S. dollar as of 4:07 p.m. in Jakarta, after mid-rates touched 9,925 earlier in the day, the weakest level since Sept. 15, 2009 according to Bloomberg data.   More Fasbi hikes needed - StanChart   Fauzi Ichsan, a Jakarta-based economist and managing director at Standard Chartered, said the government should immediately increase subsidized fuel prices, while BI should raise the Fasbi rate by at least 75bps and step up market interventions to bolster the rupiah.   “There are concerns that [the U.S. Federal Reserve’s] quantitative easing will be tapered, the budget deficit will be larger, yields will be lower and the rupiah will weaken. This is is prompting investors to take money out of the bond market and buy dollars onshore or via NDFs in Singapore,” Ichsan says. “To stem the slide in the rupiah the government must raise fuel prices to reduce the current account deficit, as this has implications for the government’s credibility. Secondly, BI must intervene more strongly in the market – but BI can’t do it alone as it is constrained by its foreign exchange reserve [levels]. The way to make the rupiah attractive to foreign and local investors is to request that exporters change their U.S. dollars to rupiah. Thirdly, raise [Fasbi] rates in a meaningful way. To make the rupiahattractive, the deposit racility [rate] should go up by 100bps.”