Indonesia central bank seen holding rates despite dovish tone

JAKARTA: Most analysts expect Indonesia's central bank to keep all rates unchanged on Thursday, but a significant minority sees a cut following comments by the governor that there could be an easing before the country's benchmark rate is changed in August.

Thirteen out of 19 analysts in a Reuters poll said Bank Indonesia (BI) will hold its benchmark rate at 6.75%. The remaining six see BI cutting by 25 basis points, adding to the three trims, by a total of 75 basis points, the central bank made in January-March.

BI's two-day policy meeting ends just hours after a Federal Reserve one. Analysts in a Reuters poll said the Fed is likely to raise US interest rates in September and possibly July, but not this week.

In April, BI announced that it would shift its main policy rate from the current 12-month reference rate to the 7-day reverse repurchase rate, to be fully effective on Aug 19.

Many analysts have assumed there will be no change in the existing benchmark rate until August.

However, after the May policy review, BI governor Agus Martowardojo said the bank does not mind easing during the transition period, and a few days later said BI might ease this Thursday if economic conditions warrant.

Indonesia's economic growth rate in the first quarter was a disappointing 4.9%, making BI cut its outlook for the full year to 5.0%-5.4% from 5.4%-5.6%.

Slow growth and low inflation - May's 3.33% annual pace was the lowest in seven years - make some see a chance for easing.

Nomura, in a note, said it thinks BI "believes there is currently a window of opportunity to deliver another rate cut after it signalled a dovish stance at its last meeting in May. This is because of a likely delay in the next Fed rate hike." 

Gundy Cahyadi, an economist at DBS, who expects a hold on Thursday, said a rate cut is "unlikely to have too significant of an impact." 

He thinks BI's recent dovish tone suggests the bank is going to relax banking lending rules to try to stimulate loan growth.

Deutsche Bank, which also calls for no cut this week, said in a note that the room to cut further may have been closed. A rate cut now could bring in some short-term macro dividend, but delay structural reforms and pose policy challenges next year when inflation and economic growth pick up, it said. - Reuters