A security guard stands near a gate outside Bank Indonesia headquarters in Jakarta, Indonesia May 19, 2016. REUTERS/Darren Whiteside/Files
JAKARTA: 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.
South-East Asia's largest economy has benefited from stronger global growth and improved commodity prices that have boosted exports and narrowed its current account deficit, but tighter US 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% 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% and 5.50%, 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% 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%, up from 3.5% last year, while Indonesia's finance minister expects inflation to reach 4.5% 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 US 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 US 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. - Reuters
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