UPDATE 2-Indonesia cbank: still room for further rate cuts

* Cbank expects strong capital inflows to continue
* Cbank sees low inflation if no change to fuel subsidies
* Cbank sees rupiah appreciating on capital inflows

(Adds details, quotes)
By Adriana Nina Kusuma and Aditya Suharmoko
JAKARTA, Feb 10 (Reuters) - Indonesia's central bank sees
room for further interest rate cuts after its surprise move
reducing the benchmark rate to a record low, hoping that banks
will lend more to drive Southeast Asia's largest economy.
Bank Indonesia (BI) made a 25 basis point cut on Thursday to
5.75 percent.
The central bank saw the 6.00 percent reference rate as no
longer appropriate, since excess liquidity in the banking system
had pushed down its interbank overnight rates and widened their
gap with the benchmark rate.
BI wants banks to boost loans to the real economy rather
than place money at the central bank, and expects strong capital
inflows to continue to keep the financial system flush with
liquidity.
"If there is still excess liquidity then there is still room
to cut the BI rate," deputy governor Hartadi A. Sarwono, who is
in charge of monetary policy, said on Friday.
With Thursday's rate cut, BI took advantage of current low
inflation to focus on boosting growth. The G20 economy posted a
6.5 percent GDP growth last year, its strongest since 1996, but
the central bank is worried weakening exports will slow growth.
"We think that BI also wants to achieve two other goals ...
Redirecting the banking sector's huge excess liquidity away from
being placed at BI to more productive loans, and at the same
time reducing BI's costs of sterilization," Anton Hendranata, an
analyst at Bank Danamon, said in a report.
Danamon was among only four research houses that predicted
Thursday's rate cut, out of a Reuters poll of 16. Danamon sees
another 25 basis point cut in March.

The rate cut means BI's deposit facility rate has now fallen
to 3.75 percent, down 25 basis points, reducing BI's
sterilization costs. The lower level is seen as more likely to
discourage banks from placing excess funds at BI.
The deposit facility rate "is apparently now close to the
average cost of funds of even some of the large-size banks, so
the central bank has gone some way in terms of reducing the
incentive to hold excess liquidity," Helmi Arman, an economist
at Citigroup, said in a report.
Teguh Hartanto, a banking analyst at Bahana Securities,
estimated that as of end-November, 31 percent of the country's
banking assets were in marketable securities and placements at
BI or other banks, meaning around 690 trillion rupiah ($77.14
billion) could potentially be channeled to loans.

GROWTH VS INFLATION
BI said on Thursday that Indonesia's economic growth could
slow to the lower end of its 6.3-6.7 percent forecast for 2012.
That view is backed up by the sharp slowing of exports in
December and by data on Friday that showed domestic motorcycle
sales, an indicator of consumption, fell 2.9 percent in January
from a year ago.
But some economists argue that Indonesia will likely be
cushioned from a global downturn because domestic demand makes
up more than half of the economy, and rate cuts now will mean
inflationary pressures may intensify in coming months.
The central bank, however, seems confident that inflation
will be under control as government plans to raise fuel prices
or cut fuel subsidies may be delayed or even cancelled.
Governor Darmin Nasution on Friday reiterated that inflation
would reach 5.2-5.3 percent this year if the government cut fuel
subsidies, still within BI's annual target of 3.5-5.5 percent.
But with no fuel policy change, it expects inflation to fall at
the lower end of the range.
After Thursday's cut, some analysts have changed their
expectations of a rate pause, and instead see the possibility of
further cuts.
"If the government postpones or cancels its plans on subsidy
reforms, further rate cuts cannot be completely ruled out,"
Citigroup's Arman said.
The rupiah weakened on Thursday after the rate cut
and slipped another 0.5 percent on Friday.
But Sarwono sees the rupiah appreciating this year because
of capital inflows and said the current level was still good for
trade. The rupiah has posted the slowest gains this year among
Asian emerging currencies excluding China.
Foreign funds have returned to Indonesia since Moody's
lifted the country to investment grade in January. Foreign
exchanges reserves rose by $1.9 billion in January to reach $112
billion.

($1 = 8,945 rupiah)

(Editing by Neil Chatterjee and Richard Borsuk)