Indonesia central bank stands pat on rates, sees slower Q3 growth

[JAKARTA]  Indonesia's central bank kept

its benchmark interest rate unchanged on Tuesday, taking a pause

after 150 basis points of rate hikes since May, and warned that

third quarter economic growth may not be as strong as initially

expected.

The 7-day reverse repurchase rate was held at

5.75 per cent, which Bank Indonesia (BI) Senior Deputy Governor

Mirza Adityaswara said is consistent with efforts to narrow the

current account gap and maintains the attractiveness of assets

for foreign investors.

A Reuters poll had expected BI to pause its tightening cycle

this week, taking advantage of relatively calm markets.

Satria Sambijantoro, Bahana Sekuritas economist, said BI may

hike next month to pre-empt the U.S. Federal Reserve's widely

anticipated December rate increase.

BI "is merely reloading its ammunition before launching

another monetary tightening in November," he said.

The rupiah, the second worst performer among emerging

Asian currencies, has remained around 15,200 a dollar in the

past two weeks, near its weakest since the Asian financial

crisis. It barely moved after Tuesday's decision.

The currency is about 11 per cent weaker than its end-2017

level, hurt by capital outflows triggered by rising U.S.

interest rates and the United States-China trade war.

Higher borrowing costs may hurt medium-term economic growth.

But although BI said loan growth continued to pick up in August,

economic growth was expected to be slower than initially

expected in the third quarter.

UNFAVOURABLE COMMODITY PRICES

The deputy governor said growth in Southeast Asia's largest

economy in July-September was expected to be "a little less than

5.1 per cent" and it may pull the rate for full-year 2018 to the

lower end of BI's 5.0-5.4 per cent outlook.

BI attributed this to weaker-than-expected export growth

due to unfavourable prices of commodities like palm oil and

coal.

This, coupled with higher oil prices inflating imports, was

likely to slightly widen the third-quarter current account

deficit from April-June, Adityaswara said.

The April-June gap was 3 per cent of GDP, already the largest

in nearly four years.

Adityaswara said with US and neighbours' interest rates

still rising, BI's stance "will be to maintain the resilience of

Indonesia's balance of payments".

The full year current account gap will likely remain below 3

per cent of GDP and efforts to rein in the deficit should bring

it down to 2.5 per cent in 2019, he said. The deficit was 1.7

per cent last year.

BI officials had previously described the central bank's

stance as "hawkish", including when it made its fifth rate hike

last month, but members of the board of governors refrained from

using the word on Tuesday.

The government has raised import tariffs on a range of

goods, delayed infrastructure projects and widened biodiesel use

to curb imports and support the rupiah.

BI expected inflation to remain within its 2.5-4.5 per cent

target range through the end of 2018. September's annual

inflation rate was 2.88 per cent.

REUTERS