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PREVIEW-Indonesia seen on hold as it keeps tabs on inflation
April 19, 2017 / 4:12 AM / 8 months ago

PREVIEW-Indonesia seen on hold as it keeps tabs on inflation

* All 15 analysts polled expect BI to keep rate at 4.75 pct

* Inflation expected to pick up later in 2017

* Decision due on Thursday, April 20 after 0700 GMT

By Fransiska Nangoy and Gayatri Suroyo

JAKARTA, April 19 (Reuters) - Indonesia’s central bank is expected to keep its key interest rates unchanged on Thursday, as authorities stay on guard over rising inflationary pressures and the risk of capital outflows.

Southeast Asia’s largest economy has benefitted from stronger global growth and improved commodity prices that have boosted exports and narrowed its current account deficit, but tighter U.S. monetary policy may exert pressure on the rupiah.

All 15 analysts in a Reuters poll predicted Bank Indonesia (BI) would keep the benchmark 7-day reverse repurchase rate unchanged at 4.75 percent for the sixth consecutive policy review.

BI was also expected to keep unchanged its two other policy rates, which act as the floor and ceiling of the overnight interbank money market , at 4.00 percent and 5.50 percent, respectively.

“We, as well as BI, expect inflation management to be more challenging in 2017 due to administered price hikes, which warrant the bank’s neutral policy stance,” Bank ANZ said in a research note.

Annual headline inflation eased last month to 3.61 percent but economists say it will likely pick up later in the year as the government continues reducing electricity subsidies.

The World Bank has flagged inflation as a risk, warning that higher prices could crimp consumptions. It projected 2017 inflation to reach 4.3 percent, up from 3.5 percent last year, while Indonesia’s finance minister expects inflation to reach 4.5 percent at the year-end.

A Bank Indonesia official has said the central bank will remain cautiously accommodative but will continue to monitor inflation and external risks, especially the potential for further U.S. interest rate hikes.

Indonesia’s trade surplus beat forecasts and foreign exchange reserves continued to improve last month, underpinned by stronger global growth and firmer commodity prices.

However, economists say further policy tightening by the U.S. Federal Reserve could spark outflows. The Fed in March raised rates for the second time in three months, and is expected to raise twice more this year.

“BI won’t want to risk sharp falls in the rupiah given Indonesia’s relatively large stock of foreign currency debt,” analysts at Capital Economics said in a note.

The rupiah fell to a 1998 low in 2015 as foreign investors dumped the country’s bonds.

BI cut its key benchmark rate six times last year by a total of 150 basis points between January and October, and eased some lending rules to boost growth. (Editing by Jacqueline Wong)

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