Indonesia expected to hold rates amid currency pressure

(Reuters) – Indonesia’s central bank is expected to keep its benchmark policy rate unchanged at 7.50 percent on Thursday even though the rupiah recently strengthened and the inflation rate has declined. Bank Indonesia (BI) has held its key rate since making a 25 basis-point cut in February, despite the worst economic slowdown since 2009. At the last two monthly meeting, it has cited the rupiah as its main focus. All 12 economists in a Reuters poll predicted BI will hold the policy rate at 7.50 percent on Thursday. "There is really no room for BI to trim its interest rate at this point," said Gundy Cahyadi, an economist with DBS in Singapore. "A weak rupiah remains a problem – even if we have seen some recovery (last) week – both on inflation and production fronts," he said. The rupiah hit its 17-year low of 14,730 per dollar on Sept. 29 as the dollar rallied against emerging market currencies after the Federal Reserve Chair Janet Yellen said it was on track to raise U.S. interest rates this year. Expectations then shifted after U.S. data released in early October indicated the Fed might put off the rate-hike, which prompted investors to put their money back to riskier assets, including to Indonesia. A series of policies announced by the Indonesian government has also improved sentiment towards Southeast Asia’s largest economy, consultancy Capital Economics said in a research note. All that helped the rupiah strengthen by more than 9 percent in five sessions ending last Friday to touch its strongest level since June. However, the rupiah shed some of its gain this week. It was traded at 13,614 per dollar as of Tuesday’s closing, 1.5 percent weaker than Friday. The annual headline inflation rate, which had been above 7 percent for four months, cooled in September to 6.83 percent. But core inflation, which strips out volatile food and administered prices, edged up to 5.07 percent, the highest since 2011. Annual economic growth in the second quarter was 4.67 percent, the weakest in six years. Indonesia will announce third quarter growth next month. A senior BI official, Juda Agung, said last week there is no room yet for it to cut rates. He also said the high level of foreign ownership in government bonds more than 37 percent – is one concern when monetary policy is decided. (JAKARTA, Oct 14/2015)

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