May 16, 2019 / 8:48 AM / 3 months ago

UPDATE 1-Indonesia holds key rate as rupiah worries block a cut

* Benchmark has been kept at 6.0% since November

* BI monitoring global markets to consider room for easing

* Rupiah has weakened more than 3% since mid-April

* BI revises current account outlook, sees wider deficit

By Gayatri Suroyo and Maikel Jefriando

JAKARTA, May 16 (Reuters) - Indonesia’s central bank on Thursday kept its key interest rate unchanged as expected, while the governor hinted he wants to cut but cannot do it yet given the country’s current account gap and global uncertainties.

Bank Indonesia (BI) kept the 7-day reverse repurchase rate at 6.00%, its level since November, as it juggles maintaining stability in Southeast Asia’s largest economy with sustaining growth momentum.

“BI will keep a close watch on the global financial market and Indonesia’s own external stability to consider room for accommodative monetary policy that is in line with low inflation and needed to support domestic economic growth,” Governor Perry Warjiyo told a news conference.

The decision comes one day after Indonesia reported that April had the biggest trade deficit Indonesia has recorded, of $2.5 billion. That hit the rupiah, which has lost more than 3% since a mid-April peak, partly because of the escalating U.S-China trade dispute.

The governor said BI will intervene in the market to keep the rupiah from depreciating too sharply. On Thursday, the rupiah hit 14,470 to the dollar, the weakest since January.

In 2018, between May and November, BI hiked the benchmark by 175 points, in response to U.S. rate increases by the Federal Reserve.

The Fed’s dovish turn this year has encouraged some Asian central banks to start cutting benchmark rates to combat slowing growth.

Last week, the Philippines cut its benchmark rate for the first time since 2012, and Malaysia made its first trim since 2016.


But Indonesia isn’t in position at present to reduce its benchmark rate, as it aims to ensure its financial assets remain attractive for foreign investors, to keep the rupiah exchange rate stable and to narrow the large current account deficit to a “safe level”.

In the first quarter, annual GDP growth softened to 5.07% as investment slowed before the April 17 elections and household consumption dipped.

The governor said 2019 economic growth is expected to be below the midpoint of its 5.0-5.4% range.

BI might refrain from cutting its benchmark this year and “not follow the herd in cutting policy rates among Asia’s central banks as GDP growth has remained robust compared to the deeper slowdown observed all over Asia,” said Masyita Crystallin, economist at DBS.

Andry Asmoro, chief economist Bank Mandiri, predicted there will be enough room for BI to cut the benchmark 25 basis points in the fourth quarter, assuming the Fed stays dovish and the current account deficit shrinks.

But Capital Economics said it’s “too soon to pencil in rate cuts” this year given Indonesia’s current account deficit, “which makes the currency vulnerable to sudden falls during periods of weak risk appetite”.

Warjiyo, who expects one rate hike by the Fed this year or next, said the short-term outlook for the current account deficit had worsened due to the U.S.-China trade war and global slowdown, revising its outlook to a range of 2.5-3% of GDP for 2019, from an initial forecast of 2.5%. The gap in 2018 was 3% of GDP. (Reporting by Gayatri Suroyo and Maikel Jefriando; Additional reporting by Fransiska Nangoy and Tabita Diela; Editing by Richard Borsuk)

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