UPDATE 2-Indonesia c.bank slashes growth, export outlook; holds rates steady

Thu May 8, 2014 6:44am EDT

Related Topics

* Policy rate on hold at 7.50 pct as widely expected

* FASBI and lending rate also unchanged

* C.bank cuts 2014 GDP to 5.1-5.5 pct from 5.5-5.9 pct previously

* Inflation target unchanged at 3.5-5.5 pct in 2014 - c.bank (Recasts, adds comments from central bank)

By Adriana Nina Kusuma and Rieka Rahadiana

JAKARTA, May 8 (Reuters) - Indonesia's central bank on Thursday slashed its economic growth outlook this year to the weakest level since the 2009 global financial crisis, due to a drop in commodity exports.

Bank Indonesia also left its policy rate unchanged for the sixth straight meeting, which was widely anticipated, but warned the current-account gap would widen in the coming quarters as exports contract from the effects of a mineral export ban.

The ban along with successive hikes in interest rates to shrink the current-account deficit caused growth in Southeast Asia's largest economy to drop to its weakest in more than four years in the first quarter.

The central bank's aggressive tightening steps last year, however, halted a widening in the current-account gap, dampened inflationary pressures and returned confidence to the rupiah.

Analysts say improved fundamentals will likely put the economy on sufficiently solid ground to defend against capital flows as the Federal Reserve winds down stimulus and ahead of an anticipated rise in U.S. interest rates.

All 15 analysts in a Reuters poll had unanimously expected the benchmark reference rate to be left unchanged at 7.50 percent, as pressures had eased. The rupiah is now Asia's best performing currency, up 4.9 percent against the dollar so far this year.

Bank Indonesia also kept the deposit facility rate (FASBI) and lending facility rate at 5.75 percent and 7.50 percent, respectively.

The recovery in fundamentals suggests BI will likely put off further policy tightening, and give more time to the series of rate hikes implemented last year to filter through the economy.

The central bank had kept the benchmark rate unchanged since December, after raising them a total of 175 basis points between June and November to calm anxious investors and stem a sell-off in Indonesian assets.

"This decision is affirming BI's stances. The bank will watch the external factors and fiscal policy of the new government at the end of the year. But for now, they are watching the current-account deficit," said David Sumual, economist at Bank Central Asia in Jakarta.

The Philippine central bank kept rates unchanged but raised banks' reserve requirements on Thursday, while Malaysia's central bank also kept rates on hold at its meeting.

PRIORITY ON DEFICIT

Indonesia's current-account deficit narrowed slightly in the first quarter to 2.06 percent of GDP but will increase further in the second and third quarters because of seasonal factors, the central bank said. That was marginally lower than the revised 2.12 percent deficit of the previous quarter but was around Bank Indonesia's estimate of around 2 percent.

The current account - the widest measure of the flow of goods, services and money in and out of the country - is estimated at below 3 percent of GDP for the full year, down from 3.3 percent in 2013.

The government has said its priority is to shrink the current-account deficit even at the expense of growth. To achieve this, analysts say policy will likely be kept tight.

"If it relinquishes the tight bias, it may fan consumption growth further and risks another bump in imports, which might well undo whatever reduction in current-account gap it has achieved thus far," Wellian Wiranto, economist with OCBC Bank, said in a research report.

The central bank, blaming weak exports, cut full-year gross domestic product growth to 5.1-5.5 percent from its previous estimate of 5.5-5.9 percent.

It sharply cut its export growth forecast to 1.5-1.9 percent this year from a previous estimate of 8.1-8.5 percent, due to the ban on mineral ore shipments and declining commodity prices.

"The contraction in real exports was mainly due to a decline in mining exports such as coal and mineral concentrate, partly due to weakening demand from China and declining prices," the central bank said in a statement.

Improvements in economic fundamentals will remain volatile amid patchy global demand and strong consumption. There is also the possibility of fuel price increases next year adding to inflationary pressures.

Domestic consumption, which contributes more than 50 percent of the economy, stayed resilient in the first quarter partly on pre-election spending in April and ahead of presidential elections in July. (Additional reporting by Nilufar Rizki and Randy Fabi; Editing by Jacqueline Wong)

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