Coronavirus | Indonesia's central bank to hold interest rates steady

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Coronavirus | Indonesia's central bank to hold interest rates steady

General view of Sudirman Central Business District SCBD following the Coronavirus disease COVID 19 outbreak in Indonesia, Sudirman Central Business District

BENGALURU Reuters - Indonesia's central bank will hold interest rates steady next week to bolster the economy as activity stallped by the recent devastating COVID 19 wave gradually gathers pace, according to a Reuters poll of economists.

Since the outbreak of pandemic, Bank Indonesia BI has injected its benchmark reverse repurchase rate of 150 basis points to a record low of 3.50% and slashed liquidity worth more than $57 billion.

All 29 economists expected the rate to remain steady at the conclusion of BI's Oct. 18 - 19 policy meeting.

The median forecasts from the poll conducted over the past week predicted interest rates would remain at their current 3.50% until the third quarter of next year, increasing by 50 basis points in the last quarter of 2022 to 4.00%.

As long as inflation remains stable and the currency remains broadly weak, they are happy to keep monetary policy supportive to try and boost the recovery, said Gareth Leather, senior Asia economist at Capital Economics.

Since mid-2020, inflation, at 1.6% in September, has held below the Central Bank's target range of 2% to 4%, and was expected to remain subdued this year. But it is being seen rising next year, to 2.9%, and then an increase of 3.0% in 2023.

The Indonesian rupiah has largely remained steady this year, down around 1% against a steady dollar. In Indonesia, recent rise in energy prices has also provided support, as Indonesia is a major commodity exporter.

The central bank has remained cautious, hoping to avoid any backward-bending from the U.S. Federal Reserve's plan to taper its bond buying program for likely beginning next month. When the Fed last depreciated in 2013, the rupiah depreciated more than 20%.

It was one of the fragile five currencies that were caught up in a big sell-off in 2013. Leather said.

There are a whole bunch of other variations now all suggesting Indonesia won't get caught up as much as it did then. Analysts say Indonesia' economy is on more solid footing. The current account deficit is relatively small, with BI's own estimate of 0.6% to 1.4% of GDP for 2021.

The trade surplus reached an all-time high in August at $4.7 billion but was expected to increase to $3.8 billion in September.

In the second quarter of this year, Indonesia's economy expanded at the fastest pace in 17 years and broke a four-quarter streak of contraction as a result of the pandemic.

However, building optimism around the recovery was clouded by an outbreak in July - one of the worst resurgences of COVID -19 in Asia - that compelled authorities to reimpose restrictions.

Southeast Asia's largest economy was expected to grow 3.2% in the quarter that ended and 4.6% in this one, according to Reuters poll released online last week.

That is down from 4.7% and 4.8% estimated in the last Reuters economic outlook poll in July, at the time of the outbreak.

The economy was projected to grow 3.4% this year and is expected to increase to 5.1% in 2022. Those forecasts were downgraded from earlier forecasts of 4.3% and 5.2% respectively. The poll showed growth is predicted to remain steady for the next 10 years and is expected to grow at 5.1% in 2023.

Consumption is expected to recover slowly as restrictions are eased, notably in 4 Q 21, noted economists at United Overseas Bank. Investment, too, should recover at a faster pace, supported by rising FDI and recent government efforts to ease business licensing.