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Economy

Indonesia central bank holds key rate, says current level 'near peak'

Economy forecast to grow 5% to 5.4% this year, higher than in 2018

Between May to November last year, Indonesia's central bank raised rates six times by a total of 175 basis points to combat capital outflows.   © Reuters

JAKARTA (Reuters) -- Indonesia's central bank on Thursday held its key rate unchanged and the governor indicated that its cycle of aggressive tightening in 2018 was "near its peak", thanks to "dovish" recent signals from the U.S. Federal Reserve.

Bank Indonesia (BI) held the 7-day reverse repurchase rate at 6.00 percent, as predicted by all 20 analysts in a Reuters poll.

Between May to November last year, BI raised the rate six times by a total of 175 basis points to combat capital outflows and contain a yawning current account deficit that contributed to the rupiah sliding to its weakest since 1998.

The currency has rebounded since, but in recent days there has been a renewed bout of weakness amid concern over China's economy and a record 2018 Indonesian trade deficit of $8.57 billion.

Governor Perry Warjiyo repeated his comment of Wednesday that the current level of the benchmark rate was "near its peak", and he noted market expectations that the Fed will have just one hike or none this year, compared with 2018's four.

"We will continue to direct our interest rate policy as part of efforts to bring down the current account deficit and maintain yield of domestic financial assets," Warjiyo told a news conference.

Given Warjiyo's "dovish tilt" and the rupiah's recent stability, BI should "remain dovish unless we see a stark reversal in the currency's trajectory in the next few months," ING economist Nicholas Mapa said.

Some other continue to project rate hikes by BI.

Natixis Asia economist Trinh Nguyen said she sees one 25 basis point hike by BI in 2019, as with the Fed, while Capital Economics sees two Indonesian hikes if the U.S. stock market falls sharply.

Southeast Asia's largest economy has been among the most vulnerable to capital outflows because it runs a sizable current account deficit that is not covered by foreign direct investment. Foreigners own a large portion of its sovereign bonds.

The third quarter's current account gap was the largest in four years, at $8.8 billion or 3.37 percent of gross domestic product (GDP).

The governor said the fourth quarter deficit was seen around $8.8 billion, but capital inflows at the end of last year had helped Indonesia's balance of payments to post a $4 billion-$5 billion surplus.

The central bank would also optimise its policy mix with other Indonesian authorities to bring the gap to 2.5 percent for 2019, Warjiyo said.

BI said 2019 economic growth would be higher than 2018's, in a range of 5.0-5.4 percent, despite its rate hikes. The central bank also remained confident inflation would stay within its 2.5-4.5 percent target range. In December, the annual rate was 3.13 percent.

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