Indonesia central bank seen holding key rate despite tepid Q1 growth

JAKARTA: Indonesia's central bank will likely keep its key rate unchanged on Thursday, despite tepid first-quarter growth, as it anticipates a possible rate hike in the United States in June.

Bank Indonesia (BI) is expected to hold the 7-day reverse repurchase rate at 4.75%, all but one of 20 analysts in a Reuters poll predicted. The other one forecast a 25 basis-point cut.

In the first quarter, South-East Asia's largest economy grew 5.01% from a year earlier, broadly in line with analyst forecasts, though some described the growth rate as disappointing.

Growth in January-March was a touch higher than the previous quarter, mainly due to stronger exports and higher government spending.

Between January and October 2016, the central bank cut the benchmark rate six times, by a total 1.5 percentage points, to try to lift growth.

For BI, "there is no compelling reason to trim its policy rate further at this point," said Gundy Cahyadi, an economist with DBS in Singapore.

HIGHER INFLATION RATE? 

He noted that the inflation rate, low in 2016, is "already back above 4%" and could get higher.

Annual inflation in April hit a 13-month high of 4.17%. The government has said it will delay all planned price increases to help inflation stay in BI's 3%-5% target range.

ING Financial Markets, the only poll participant seeing a rate cut on Thursday, said the first-quarter growth reading "underscored the need for greater policy stimulus". 

It argued that Indonesia's wider trade surplus would be positive for the rupiah, a main constraint to BI cutting rates.

BI governor Agus Martowardojo last week said BI's policy stance remained neutral. 

He also said the Federal Reserve in June will likely increase interest rates for a second time this year and it would hike again later in the year.

Of the 10 analysts who gave end-year forecasts for Indonesia's benchmark, two see BI hiking the key rate. 

Deutsche Bank was one of them, pencilling in a 25 basis point rise, with economist Michael Spencer citing inflation's upward trajectory as the main reason.

But Cahyadi of DBS, who had previously said he anticipated an interest rate hike in the second half, said "chances of it happening are slimmer now given the slightly underwhelming 1Q17 GDP data". - Reuters