Emerging markets have been sent into a tailspin in recent weeks on fears that the United States may taper off its huge stimulus programme.
Indonesia has been particularly badly hit with investors also fretting about its domestic problems, such as a widening current account deficit, slowing growth and high inflation.
As the sell-off accelerated in the past week, Bank Indonesia called an extra policy meeting for Thursday -- two weeks before its board was due to meet -- and announced a 50-basis-point hike in its key interest rate to 7.00 per cent.
Bank spokesman Difi Johansyah said that the board of governors saw much "pressure and uncertainty" weighing on the Indonesian economy.
Investor reaction was positive, with the Jakarta benchmark index closing 1.92 per cent higher. It has fallen heavily in recent weeks, at one point going below the psychologically important 4,000 barrier.
The bank has now hiked rates by a total of 1.25 percentage points since June as it seeks to halt a slide in the value of the rupiah and tackle inflation which hit a four-year high after a hike in fuel prices.
The Indonesian rupiah has lost about 12 per cent his year, hitting four-year lows.
The bank also tweaked monetary policy in several other areas including a hike in the rate it pays lenders for overnight deposits by 50 basis points to 5.25 per cent.
Officials hope this will encourage lenders to leave their rupiah with the central bank, thereby reducing money supply and in theory stopping the rupiah from weakening further.
The bank stood firm at its last scheduled meeting, on August 15, amid fears that too sudden a tightening of monetary policy could hit already slowing growth.
However, the market turmoil of the past week -- which has seen stocks across Asia tumble and the Indian rupee fall to a lifetime low -- prompted the bank to call Thursday's meeting.-Channel News Asia
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