Indonesia's central bank keeps rates at record lows, prepares for U.S. tapering

FILE PHOTO: The logo of Indonesia's central bank, Bank Indonesia, is seen on a window in the bank's lobby in Jakarta, Indonesia September 22, 2016. REUTERS/Iqro Rinaldi

JAKARTA (Reuters) - Indonesia's central bank held its benchmark interest rate at a record low on Thursday as it tries to continue to support the economy's recovery from the coronavirus pandemic without adding downward pressure on the rupiah currency.

Bank Indonesia (BI) kept the 7-day reverse repurchase rate at 3.50%, where it has been since February, as expected by the majority of economists in a Reuters poll. Its two other main rates were also kept unchanged.

Indonesia's economy grew a bigger-than-expected 7.07% in the second quarter, but some analysts worry coronavirus restrictions imposed in July could cloud the outlook, even though curbs have gradually been eased in August.

"Let me repeat again that all of BI's policies will be pro-growth this year," Governor Perry Warjiyo told a streamed news conference.

"Monetary policy, with low interest rates and loose liquidity, will be continued."

While BI expects the economic recovery to continue in the second half of the year, supported by progress in the vaccination drive and a reopening of the economy, Warjiyo said the Delta variant and the prospect of U.S. tapering posed risks.

Minutes from the Federal Reserve's July meeting released on Wednesday showed officials largely expect to reduce the U.S. central bank's monthly asset purchases later this year.

But Warjiyo did not expect the impact from Fed tapering to be as big as during the 2013 so-called "taper tantrum", when capital outflows triggered a 20% fall in Indonesia's currency.

He also said BI had policy tools to deal with any fallout from tapering, such as its currency stabilisation instruments.

The rupiah, which has been gradually falling in the past two weeks amid talk of U.S. tapering, gained slightly after BI's announcement to trade down 0.2% on the day.

"The need to secure rupiah stability added to the reasons for the central bank to keep rates on hold today, coming close on the heels of the (Fed) minutes which raised the likelihood that the tapering of asset purchases might start this year," said Radhika Rao, a DBS economist.

Josua Pardede, an economist with Jakarta-based Bank Permata, said he expected BI to begin withdrawing some of the liquidity surplus in the market once the Fed begins tapering its quantitative easing.

The central bank kept its 2021 growth forecast at 3.5% to 4.3%. To aid the economic recovery, Warjiyo said BI will issue rules aimed at bolstering lending to small and medium enterprises on Sept. 1.

BI has cut interest rates by a total of 150 basis points and injected over $57 billion of liquidity into the financial system since the pandemic began early last year.

Indonesia has struggled with the worst coronavirus outbreak in Southeast Asia.