February 15, 2018 / 10:44 AM / a year ago

UPDATE 1-Indonesia cbank holds rates, sees economy improving but eyes volatile markets

JAKARTA, Feb 15 (Reuters) - Indonesia’s central bank kept its policy rate unchanged on Thursday as expected, as it looks to maintain stability in the struggling rupiah currency following an unexpected spike in global volatility.

Bank Indonesia (BI) held its seven-day reverse repurchase rate at 4.25 percent for the fifth policy meeting. It also kept the floor and ceiling rates unchanged.

It had surprised markets by cutting the rate by 25 basis points in August and again in September in a bid to boost lending and business activity.

Governor Agus Martowardojo told reporters that previous monetary easing was sufficient to support the economy.

“This is consistent with the efforts to maintain macro stability and financial system as well as to support the domestic economy,” Martowardojo said, adding that activity this year would be supported by improving investment.

Growth in Southeast Asia’s largest economy picked up slightly in the fourth quarter to the fastest pace in four years, with further gains seen this year, while inflation has remained modest.

That has left policymakers more focused on external risks such as global market volatility and expectations of further U.S. interest rate hikes, which could prompt yield-hungry investors to pull capital from emerging markets.

The rupiah has seen wild swings in recent weeks — at one point sinking to its weakest level since mid-2016 — as global investors dumped riskier assets.

Unlike many of its peers in Asia, the rupiah has made no headway against the faltering U.S. dollar so far in 2018 and lagged gains in other currencies last year, despite improvements in Indonesia’s fiscal position.

In its statement, BI said it is watching global risks such as financial market volatility and will maintain a presence in foreign exchange markets to guard against excess volatility in the rupiah.

Martowardojo, whose term is due to end in May, said the central bank’s monetary policy stance remained neutral, though deputy governor Perry Wardojo noted other measures introduced by BI will still help boost loan growth.

In its previous meeting, BI had said it will accelerate moves to relax banks’ reserve requirements to give them more flexibility in managing their excess cash.

BI has cut its key benchmark rate by 200 basis points since the start of 2016 in hopes of spurring credit growth and consumption, which makes up about half of the Indonesian economy.

But activity has been picking up only grudgingly, with the annual GDP growth rate stuck near 5 percent since 2014 and loan growth remaining subdued, staying below 10 percent since the start of 2016.

While economic growth is now seen as more sustainable, BI does not see a significant increase in consumption this year, Martowardojo said.

While some analysts now see a chance of a hike in rates this year, Capital Economics still sees room for a cut.

“Provided the currency remains relatively stable against the US dollar as we expect, then further easing is likely, probably around the middle of the year,” said Gareth Leather, senior economist at Capital Economics. (Reporting by Nilufar Rizki and Maikel Jefriando; Additional reporting by Tabita Diela; Writing by Fransiska Nangoy; Editing by Ed Davies and)

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