Indonesia c.bank holds key rate, cuts RRR for banks

Credit: REUTERS/WILLY KURNIAWAN

Indonesia's central bank on Thursday kept its benchmark interest rate unchanged, as expected, but lowered the amount of cash that banks must hold as reserves to provide additional liquidity to lenders and support growth.

By Maikel Jefriando and Nilufar Rizki

JAKARTA, Nov 21 (Reuters) - Indonesia's central bank on Thursday kept its benchmark interest rate unchanged, as expected, but lowered the amount of cash that banks must hold as reserves to provide additional liquidity to lenders and support growth.

Bank Indonesia (BI), having reduced rates in four previous back-to-back policy meetings, kept the 7-day reverse repurchase rate IDCBRR=ECI unchanged at 5.00%, as predicted by 20 of 24 economists in a Reuters poll.

Governor Perry Warjiyo said BI would lower the reserve requirement for banks by 50 basis points from Jan. 2, freeing up 26 trillion rupiah ($1.84 billion) of additional liquidity for lenders to extend as new loans.

He said loan growth had suffered from sluggish demand from corporations. The central bank cut its outlook for loan growth to 8% this year, from a range of 10%-12% previously.

"Corporations are still measuring future economic prospects...because this will affect how much they will increase production capacity," Warjiyo told a news conference, noting that production had declined.

"We see that our economy is improving going forward and this should improve economic prospects and corporations' confidence," he said, adding that BI will continue to make its policy accommodative to support growth.

After the rate decision, the rupiah .IDR= was little moved at 14,110 against the dollar at 0729 GMT, while the stock market .JKSE trimmed its losses.

Since the current easing cycle began in July, BI has reduced its key rate by 100 basis points. It has also loosened lending rules in an overall policy mix that the governor described as "pre-emptive measures" to maintain economic growth momentum amid a global economic slowdown.

Indonesia's economy, the largest in Southeast Asia, has suffered from the fall off in global trade amid a prolonged tariff war between the United States and China.

Annual economic growth slid to 5.02% in the third quarter, the slowest pace in more than two years, as weak export earnings hit consumption, investment and government finances.

Warjiyo said GDP was likely to improve in the fourth quarter due to seasonal patterns. BI's forecast for 2019 GDP growth was 5.1%, he said, in line with previous estimates.

BI's inflation forecast was 3.1% at the end of the year, within its target range. It also forecast that the current account deficit would narrow to 2.7% of GDP for 2019, down from 3% of GDP in 2018.

Enrico Tanuwidjaja, an economist with UOB Indonesia, said inflation may accelerate going forward due to a likely removal of subsidies, while BI's objective to keep the current account deficit in check would require "less-loose" monetary policy.

"Therefore, we expect BI to hold its benchmark interest rate at 5.00% till end-2019," he said, adding that other instruments may be used to boost GDP growth.

Capital Economics said BI's reserve requirement cut "should provide a boost to growth but is less likely to put downward pressure on the currency than an interest rate cut".

But noting the governor's growth concerns, the consultancy believes the rate-cut cycle will continue soon.

Last year, BI raised its key rate by 175 basis points to halt capital outflows linked to U.S. monetary tightening that put the rupiah under pressure.

($1 = 14,110.0000 rupiah)

(Additional reporting by Tabita Diela and Fransiska Nangoy Writing by Gayatri Suroyo; Editing by Ed Davies and Jacqueline Wong)

((gayatri.suroyo@thomsonreuters.com; +622129927609; Reuters Messaging: gayatri.suroyo.thomsonreuters.com@reuters.net))

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