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Indonesia central bank seen holding rates steady amid COVID curbs, Fed tapering talk

Indonesia central bank seen holding rates steady amid COVID curbs, Fed tapering talk

Bank Indonesia's logo is seen at Bank Indonesia headquarters in Jakarta on Sep 2, 2020. (File photo: Reuters/Ajeng Dinar Ulfiana)

JAKARTA: Indonesia's central bank will keep its benchmark interest rate at a record low on Thursday (Aug 19) as it tries to continue to support the economic recovery without adding more pressure on the rupiah amid United States tapering concerns, a Reuters poll showed on Monday.

All but one of 24 analysts surveyed by Reuters expected Bank Indonesia (BI) to leave the seven-day reverse repurchase rate at 3.50 per cent, where it has been since February. One economist sees BI cutting rates by 25 basis points.

Data earlier this month showed that the second-quarter GDP beat forecast with a 7.07 per cent annual expansion, but analysts warned that mobility restrictions imposed since July to control a rise in COVID-19 cases will hamper the recovery.

Meanwhile, concerns that the US central bank may soon start unwinding its pandemic-era stimulus has sent the rupiah down about 0.5 per cent over the past week.

The Federal Reserve is expected to announce a plan to taper its asset purchases next month, according to a separate Reuters poll. This could trigger capital outflows and hurt emerging market currencies.

"Bank Indonesia is likely to leave interest rates unchanged at its meeting on Thursday. Although the economy remains very weak, concerns about the stability of the currency mean the central bank will not want to take any risks," Alex Holmes, emerging Asia economist at Capital Economics wrote in a research note.

Governor Perry Warjiyo pledged a long period of low interest rates as the new COVID-19 wave delays the economic recovery in an interview with Reuters earlier this month.

Since last year, BI has cut rates by a total of 150 basis points and injected more than US$57 billion worth of liquidity into the financial system to help Southeast Asia's largest economy weather the COVID-19 pandemic.

Warjiyo also told Reuters in the interview that Indonesia was better prepared than in 2013 for any potential capital outflows from a US tapering announcement.

In 2013, an announcement by the Fed about tapering off its quantitative easing set off emerging markets capital outflows that knocked the rupiah down more than 20 per cent, forcing BI to hike rates at the time.

Warjiyo also told Reuters BI may not hike its benchmark rate until after the Fed raises US rates, and that an Indonesian rate increase would not come until the end of 2022 at the earliest.

Source: Reuters/kg

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