UPDATE 2-Indonesia holds key rate at record low amid rupiah, virus worries

* Key rate kept at record low of 3.50%

* governor pledges to keep stabilising rupiah

* Sees prospect of Fed tapering from Q1 2022 (Adds economist comment, new governor quote)

JAKARTA, June 17 (Reuters) - Indonesia’s central bank held its benchmark rate at a record low on Thursday as it sought to keep monetary policy accommodative amid a rise in COVID-19 cases and maintain stability in the rupiah currency.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at 3.50% for a fourth straight meeting, as unanimously expected in a Reuters poll.

Governor Perry Warjiyo reiterated a pledge to keep interest rates low and liquidity abundant until inflation rises, which he expects to happen in early 2022 at the earliest. Annual inflation remains below BI’s 2% to 4% target.

He said it was too early to worry about a change in U.S. monetary policy, even as the Federal Reserve began closing the door on its pandemic-driven monetary policy. Previous talk of U.S. tapering triggered capital outflows, hurting Indonesia’s currency.

“Measures that we will take are to optimise stabilisation efforts for the rupiah exchange rate and coordinate with fiscal authorities so that the impact on bond yields is within fair limits,” said Warjiyo .

“That is the focus to mitigate the spillover impact from the Fed, so that our other policies can be oriented for domestic purposes.”

The rupiah fell as much as 0.94% against the dollar after the Fed statement, but stood down around 0.8% following BI’s decision.

While the central bank said household consumption, manufacturing activity and exports have all improved in the second quarter, it said BI will monitor the impact of rising coronavirus infections on economic activity.

Rising cases have fuelled concerns authorities could reintroduce wider mobility restrictions, derailing the recovery. BI kept its GDP forecast for this year unchanged at 4.1% to 5.1%.

Capital Economics said the economy would benefit from further stimulus with output still below pre-crisis level, but concerns about the currency mean further easing is unlikely.

“Overall, we think the central bank will leave interest rates unchanged until at least the end of the year,” it said.


BI expected the Fed to begin reducing its bond buying programme in the first quarter of next year and U.S. rate hikes will likely happen the year after.

The Fed’s announcement in 2013 that it would taper its quantitative easing programme triggered capital outflows in emerging markets, with Indonesia among the worst hit as its currency fell more than 20%.

“In wake of the surprising hawkish tilt in the U.S. Fed’s policy stance, BI is likely to remain cautious on the implications for financial market stability,” said Radhika Rao, economist at DBS, adding that she did not think BI would have to rush to raise rates like in 2013 due to benign inflation.

BI has cut interest rates by a total of 150 basis points and pumped more than $57 billion worth of liquidity into the financial system since 2020. (Reporting by Gayatri Suroyo, Fransiska Nangoy and Tabita Diela; Editing by Ana Nicolaci da Costa)