Indonesia central bank holds rates, sees ‘limited’ growth gains

By Nilufar Rizki and Gayatri Suroyo

JAKARTA (Reuters) – Indonesia’s central bank on Thursday held its benchmark interest rate, contrary to expectations for a fifth cut this year, and said previous easing moves are helping the sluggish economy improve.

The 12-month reference rate, its current benchmark , was kept at 6.50 percent. Eleven of 16 economists in a Reuters poll predicted a 25 basis point (bp) cut.

Starting next month, Bank Indonesia (BI) will switch to the 7-day reverse repurchase rate as its benchmark. That rate was also held on Thursday, at 5.25 percent.

BI’s easing moves have been aimed at boosting growth, which last year slid to 4.8 percent, the lowest since 2009.

The central bank’s changes in benchmark, announced in April, is intended to better transmit monetary policy to the market, which should increase the impact of its easing cycle.

BI said on Thursday that transmission has improved, and expects April-June growth will show “limited” gains from Q1, which disappointed with 4.92 percent.

Q2 economic data will be announced on Aug. 5. BI maintained its full-year 2016 growth outlook at 5.0-5.4 percent.

Juda Agung, BI executive director of economic and monetary policy, said the bank still has room for further monetary loosening, but refrained from cutting rates on Thursday because BI’s earlier rate cuts have pushed down commercial banks’ deposit and lending rates.

“Looking ahead, we are assessing macroeconomic stability and economic growth, but the room (for easing) is still there,” he told reporters.

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RBS economist Vaninder Singh, who predicted a cut on Thursday, said he still expects 50 basis points of reduction by year-end as there’s been a “sharp reduction” in Indonesia’s domestic and external vulnerabilities.

Before Thursday, BI trimmed its main policy rate four times by a total 1 percentage point, cut banks’ reserve requirement ratio twice and adjusted lending rules to provide commercial banks more liquidity.

But despite lower rates, lending remained sluggish. As of May, bank loans grew an annual 8.3 percent, only slightly faster than April’s 8 percent and significantly lower than banks’ plans to make them grow 12.5 percent this year.

BI reiterated that the government’s new tax amnesty program will help provide banks even more liquidity and boost economic growth.

The amnesty, which offers low tax rates for taxpayers declaring previously concealed assets, is meant to attract back billions of dollars of Indonesian money parked overseas.

BI’s Agung said the amnesty should result in 560 trillion rupiah ($42.8 billion) repatriated to Indonesia.

(Additional reporting by Hidayat Setiaji; Editing by Richard Borsuk)