Indonesia central bank keeps rates unchanged, markets raise bets on rate cuts

JAKARTA, June 25 (Reuters): Indonesia's central bank left its policy interest rates unchanged this week, as widely expected, extending a pause in its tightening cycle after inflation eased to within its target range for the first time in a year.

For the fifth consecutive meeting, Bank Indonesia (BI) kept its benchmark 7-day reverse repurchase rate steady at 5.75%. Its two other rates were also kept unchanged.

Inflation in Southeast Asia's largest economy cooled to 4% in May, earlier than BI had expected, having peaked at near 6% in September.

Wary of rising global uncertainties, which include a potential rate hike by the US Federal Reserve next month and China's monetary easing after its economic recovery appeared softer than expected, Governor Perry Warjiyo reiterated that BI's policy focus was on maintaining the stability of the rupiah currency's exchange rate.

"We're more focused on the medicine that will directly affect the rupiah's stability, which is increasing the intensity of our (currency) intervention," Warjiyo told a news conference, adding that policymakers did not mind the resulting decline in foreign exchange reserves.

The rupiah has gained about 4% against the U.S. dollar so far this year, making it the best performer among emerging Asian currencies. But it has came under pressure after recent hawkish comments by Fed officials pointing to more rate hikes.

Warjiyo said the rupiah will strengthen after global uncertainties ease.

Meanwhile, easing inflation has prompted some analysts to forecast BI will start to cut rates later this year to shore up economic growth, following easing by central banks in countries such as Vietnam and China.

.RATE CUTS?

Asked about timing for rate cuts, the governor said interest rate decisions would be calibrated every month, but that Thursday's decision to stand pat would ensure inflation remained within BI's 2% to 4% target range for the remainder of 2023, and reach 3.2% at year end.

The central bank has raised interest rates by a total of 225 basis points between August to January to curb surging prices.

"BI today gave no clear indication over its next move. But provided the currency continues to hold up against the U.S. dollar, then we think BI will start cutting rates relatively soon," said Gareth Leather, an economist with Capital Economics, predicting a cut as soon as October

ING's economist Nicholas Mapa said BI's policy path will likely be dependent on the rupiah.

"BI may only be able to consider an eventual pivot to rate cuts once pressure on the rupiah dissipates while inflation stays subdued," he said.

BI has shown concerns over slowing economic growth.

Last month, it dropped the phrase "bias towards the upper end" from its description for this year's gross domestic product growth outlook, although it maintained the range at 4.5% to 5.3%. That forecast was kept on Thursday.

Growth in resource-rich Indonesia is expected to slow this year as global commodity prices moderate, weighing on its key exports. The economy expanded 5.3% last year.

To help aid economic activity, BI will redirect its liquidity incentives to banks that extend loans to sectors such as mineral processing, residential property and tourism. Currently, such incentives are given to banks lending to sectors badly hit by the COVID-19 pandemic such as aviation.

The central bank will also increase the frequency of its forex term deposit auctions and introduce more tenors for its short term forex deposits in order to allow banks to better manage their excess foreign currency liquidity. - Reuters