UPDATE 2-Indonesia holds key rate as activity picks up, eyes Fed tapering

* keeps benchmark rate at 3.50% for 7th straight review

* Reiterates impact of Fed tapering likely to be less than in 2013

* Says economic activity improving, maintains 2021 GDP forecast (Adds details, economist comment)

JAKARTA, Sept 21 (Reuters) - Indonesia’s central bank left its main policy rates steady at a record low on Tuesday to support an economic recovery from a recent devastating resurgence of COVID-19, while anticipating the impact of U.S. tapering later this year.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at a record low of 3.50% for a seventh straight policy review, as expected by all 25 analysts in a Reuters poll.

While the central bank said domestic activity picked up after a recent easing of coronavirus curbs, it kept its target range for 2021 growth unchanged at 3.5% to 4.3% after a downgrade in July.

“The decision is in line with the need to maintain foreign exchange stability, amid low inflation and efforts to support economic growth,” Governor Perry Warjiyo told an online news conference, describing BI’s policy as “pro-growth”.

The rupiah strengthened 0.04% after the rate decision.

The currency has come under pressure in recent months on expectations the U.S. Federal Reserve could soon begin to taper its bond purchases. It has gained nearly 1% since BI’s last meeting, but is still down 1.4% on the year.

BI expected Fed tapering to start in November and U.S. interest rates to rise in the third quarter of 2022, Warjiyo said, earlier than the bank had previously expected.

But he reiterated that Indonesia should not be as affected as during the 2013 “taper tantrum”, when the rupiah lost more than 20% of its value against the dollar.

The governor also flagged Chinese companies’ credit default risk as another factor behind global financial uncertainties.

However, Warjiyo said the rupiah had “a tendency to strengthen or at least remain stable” as the economic outlook brightens, capital inflows continue and Indonesia’s external balance improves.

Southeast Asia’s largest economy pulled out of recession in the second quarter. While the recovery momentum was hit by fresh curbs in July, BI said domestic activity had gradually improved since curbs were eased in late August.

The resource-rich nation posted a record trade surplus in August which analysts say could underpin the rupiah.

“We agree that Indonesia is in a much better position to weather the anticipated tapering this time around,” an ANZ analyst said in a note, pointing to a smaller current account deficit and recent large trade surpluses.

“Indonesia’s external position is much stronger now, which reduces the urgency for BI to hike rates.”

BI has cut interest rates by a total of 150 basis points and launched a quantitative easing programme since the pandemic started. (Additional reporting by Bernadette Christina Munthe; Editing by Ana Nicolaci da Costa and Clarence Fernandez)