Central Bank Seen Holding Key Rate, Hoping Past Cuts Can Aid Growth

Indonesia's central bank, Bank Indonesia, in Jakarta. (Reuters Photo/Fatima El-Kareem)

By : Gayatri Suroyo | on 6:01 PM February 15, 2017
Category : Business, Economy

Jakarta. Indonesia's central bank is expected to hold its benchmark interest rate steady again on Thursday and rely on last year's rate cuts to help boost economic growth.

All 20 analysts in a Reuters poll predicted Bank Indonesia (BI) will keep the 7-day reverse repurchase rate at 4.75 percent, where it has been since October, despite economic growth coming in below expectations.

BI slashed the key rate six times last year by a total of 150 basis points to try to boost growth. The central bank has also eased reserve requirement rules, relaxed mortgage requirements and cut the lending rate ceiling for credit cards.

Despite those efforts, annual economic growth in 2016's final quarter slowed to 4.94 percent, partly due to big cuts in government spending.

"For now, there is simply no good reason for BI to steer away from its current policy stance," said Gundy Cahyadi, an economist with DBS in Singapore, citing concerns on inflation projection and uncertainty about U.S. Federal Reserves rate hikes.

Indonesia's annual inflation rate increased to 3.49 percent in January, still inside BI's target range of 3-5 percent.

Rising Inflation

BI has previously said the inflation rate may move above 4 percent later this year, but that the bank and the government will try to keep it low to maintain purchasing power.

ANZ predicted annual inflation to average at 4.6 percent this year, largely due to removal of some subsidies. Its analysts said this inflation outlook "will warrant a neutral policy stance".

Earlier this month, BI Governor Agus Martowardojo said the bank's stance was "cautiously accommodative" for growth. When responding to the weaker-than-expected growth rate, BI said it would utilise the room for monetary easing in a measured way to try to maintain stability and keep growth momentum at the same time.

The government, on the other hand, has said it will contribute more to growth this year.

Some analysts, including Credit Suisse, maintained their view that BI could still cut the key rate once this year for another push for growth. But others are convinced BI is done with its easing cycle.

"Leaving policy rates unchanged this year will help support the rupiah stability and keep debt investors comfortable," wrote Taimur Baig, Deutsche Bank's chief economist for Asia, adding that BI may raise rates next year if the inflation rate goes higher.

Last year, the rupiah strengthened 2.6 percent against the dollar, and in 2017 it is up 1.1 percent.


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