JAKARTA, Oct 19 Reuters - Indonesia's central bank held its policy rates steady at record lows on Tuesday to support a tentative recovery while economic activity picked up in recent months thanks to rebounding consumption and robust commodity exports.
Bank Indonesia BI held the benchmark 7 - day reverse repurchase rate at 3.50% for the eighth month, saying that the decision was in line with the need to support the recovery while keeping the rupiah stable. All 29 analysts in Reuters poll predicted the move.
While the central bank said domestic growth was being buoyed by strong exports and improving consumption after a recent easement of coronavirus curbs, it stuck to its forecast for 3.5% to 4.3% growth this year.
Economic conditions have improved, but the domestic demand is still far below potential output That's why interest rates will remain low this year and liquidity will remain loose, said Governor Perry Warjiyo.
He also said the central bank would continue to allow banks to give loans for the purchase of vehicles and properties without requiring a downpayment to support demand next year.
Meanwhile, the resource-rich country was benefiting on the back of booming commodity prices from an export surge. According to recent government data, Indonesia's trade surplus was bigger than expected in September.
Against this backdrop, BI revised its outlook for the current account deficit this year, expecting it to range between 0% and 0.8% of the gross domestic product GDP from a previous range of 0.6% to 1.4% of GDP.
Booming exports have also underpinned the rupiah, which has gained about 1.1% against the dollar since the BI's last meeting, but is still negative 0.3% on the year.
Warjiyo said Indonesia's more favorable external balance position meant it was better prepared to withstand any global market volatility that may be triggered by U.S. trimering.
Talk that the Federal Reserve would begin reducing bond purchases weighed on the rupiah earlier this year raising concerns of a rerun of the so-called taper tantrum of 2013, when the rupiah fell more than 20% due to a U.S. tapering announcement weighing on the rupiah,
Analysts did not expect any more rate hikes this year, nor did they expect rate cuts given the benign inflation outlook of the United States. The central bank expects inflation to hit 4% at midpoint of its 2021 target range.
In our base case, we expect Morgan Stanley to normalise the policy rate in 2022 to 50 basis points and as the growth recovery firms, BI said in a note.
Warjiyo reiterated that BI would start any monetary tightening by reducing the amount of liquidity it injects into the financial system, with the central bank only likely to start discussing rate changes in late 2022.
Since the pandemic has BI launched a quantitative easing program by a total of 150 basis points and cut interest rates.