UPDATE 3-Indonesia c.bank trims economic outlook, rates stay on hold

Thu Jun 12, 2014 7:33am EDT

Related Topics

* Policy rate on hold at 7.50 pct, as expected

* FASBI and lending rates also unchanged

* Budget cuts to limit growth to 5.15 pct in 2014 - c.bank

* Analysts split over c.bank's next policy move (Adds details, central bank statement)

By Nilufar Rizki and Adriana Nina Kusuma

JAKARTA, June 12 (Reuters) - Indonesia's central bank kept policy rates on hold on Thursday, but once again trimmed its economic growth outlook as weakening exports add pressure on the country's current account.

Bank Indonesia left its benchmark reference rate unchanged at 7.50 percent, as widely expected, ahead of next month's presidential election.

The country's current-account deficit is at risk of widening in the coming quarters as exports contract from the effects of a mineral export ban and weaker commodity prices.

"As you know, the current account issue is still a problem," said Yudha Agung, the central bank's executive director for economic and monetary policy. "Seasonally, in the second quarter the current account usually widens further."

Emerging markets such as Indonesia are dependent on capital inflows to fund large current-account deficits and remain vulnerable to selling of its assets by portfolio funds.

On Thursday, central banks in the region took different stances on policy but rates appear to be on a firming trend. New Zealand's central bank raised rates to a five-year high to curb price pressures from strong growth, while the Bank of Korea kept rates on hold but is expected to hike as soon as next quarter.

A Reuters poll of 11 analysts had projected Indonesia's central bank would keep its policy rate unchanged for a seventh straight month.

The central bank also left the deposit facility rate, or FASBI, and lending facility rate at 5.75 percent and 7.50 percent, respectively.

Bank Indonesia has 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.

POLICY OUTLOOK UNCERTAIN

The outlook for Indonesia's monetary policy, however, is becoming more cloudy.

The government has said its priority is to shrink the current-account deficit even at the expense of growth.

The central bank is targeting a current-account deficit of around 2.8-2.9 percent of GDP this year, lower than last year's 3.3 percent.

But GDP growth is expected to slow to its lowest level in five years. The central bank said budget cuts would limit GDP growth to 5.15 percent this year, which is at the low end of its recently revised 5.1-5.5 percent target. BI had revised that sharply down from 5.5-5.9 percent previously.

That has left analysts split on whether the central bank's next move will be to raise or cut rates.

"BI's focus is ... likely to shift towards supporting growth," said Gareth Leather, economist at Capital Economics.

"Provided the current account does not jump back up again and the rupiah remains fairly stable, we think the next move in rates will probably be down, although not until early next year."

But others expected the central bank would raise rates.

"If anything, we continue to see risks of a hike rather than a cut in the coming quarters. While GDP growth momentum has slowed quite markedly in 1Q14, domestic demand remains resilient," said Gundy Cahyadi, economist at DBS.

Indonesia reported an unexpectedly large trade deficit of nearly $2 billion in April, as weaker commodity prices also dragged on exports and renewed pressure on the current account.

Investors are also worried about political risks amid growing uncertainty over the outcome of presidential elections on July 9. The next central bank meeting is due on July 10.

After the rate decision, the rupiah strengthened to 11,795 versus the dollar. The Jakarta Stock Exchange index eased 0.76 percent to 4,934. (Additional reporting by Fransiska Nangoy; Writing by Randy Fabi; Editing by Jacqueline Wong)

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