Indonesia central bank seen holding key rate

MACROECONOMICS - Indonesia's central bank, which will unveil a policy decision shortly after the Federal Reserve is expected to hike U.S. interest rates, will keep its key rate unchanged on Thursday to maintain financial stability, a Reuters poll showed.

All 21 analysts in the poll predicted that Bank Indonesia (BI) will keep the 7-day reserve repurchase rate at 4.25 percent.

BI cut the rate by 25 basis points in both August and September, then held it the following two months.

Keeping the rupiah stable is a high priority for BI, as policy tightening by the Fed could leave the currency and Indonesian bonds vulnerable to outflows.

"Even though the market has priced in a Fed hike, BI would anticipate a weakening in the rupiah," said Josua Pardede, an economist with Bank Permata in Jakarta. He noted that foreign exchange reserves dropped in October and November.

Indonesia's forex reserves declined to $126.0 billion at the end of November from a record high $129.4 billion at the end of September. Bank Indonesia attributed the drops partly to moves to stabilise the rupiah.

The rupiah was relatively stable on much of this year, reaching 2017's strongest level in early September. But then it dropped to a multi-month low and continued to weaken in October.

For the year, the currency has weakened about 0.6 percent, but the decline since early September has been around 3 percent.

When Indonesia cut its key rate in September and October in a bid to boost economic growth that's been stuck at about 5 percent, it took advantage of low inflation rates.

The annual inflation rate fell again in November to 3.30 percent, the lowest in 11 months. And BI last month said it expects inflation to be at around 3-3.5 percent by the end of the year, at the lower end of its 3-5 percent target for the year.

But with the weakening of the rupiah and interest rates generally rising globally, economists say there's no room for a further trim now.

Some economists expect BI to maintain the main policy rate at 4.75 percent until March or later.