Bank Indonesia holds rates steady, plans new way to attract inflows

By Fransiska Nangoy and Bernadette Christina

JAKARTA (Reuters) -Indonesia's central bank left interest rates unchanged on Thursday, as expected, saying current levels are sufficient to keep inflation in check, while strengthening efforts to stabilise the rupiah currency.

Bank Indonesia (BI) plans to issue new rupiah-denominated securities, using its holdings of government bonds as the underlying asset, as a new monetary instrument aimed at attracting foreign portfolio capital flows, Governor Perry Warjiyo said.

BI kept the benchmark 7-day reverse repurchase rate at 5.75% for its seventh straight monthly policy review, as widely expected by economists surveyed by Reuters. Its two other main rates were also left unchanged.

BI has been trying to balance currency stability, keeping inflation in check and maintaining growth momentum in Southeast Asia's largest economy as exports fall amid softening commodity prices.

There have been calls for the bank to start considering rate cuts to shore up growth after inflation cooled to within its target earlier than expected, but some economists say further tightening is necessary to prevent capital outflows.

Guarding the rupiah "is our way to protect the domestic economy, inflation and growth from global spillovers," Warjiyo told reporters.

"All countries are experiencing currency depreciations, our focus is to stabilise the exchange rate through intervention," the governor said, especially by intervening in the spot and domestic non-deliverable forward markets and relying on its new securities.

"We have over 1,000 trillion rupiah of government bonds that we can use as underlying assets for the Bank Indonesia Rupiah Securities," he said, adding that the notes will have 6-, 9- and 12-month maturities and are to be offered from Sept. 15.

The new notes will replace BI's reverse repo with the same tenors used in monetary operations and can be traded on the secondary market, Warjiyo told a separate call with analysts.

With the new instrument, the bank will also switch the use of its bond holdings from the so-called 'Operation Twist' where it sells short-term government bonds and buys long-term bonds to help stabilise yields and the rupiah.

The rupiah, which had gradually fallen since mid-July to its weakest levels since March, strengthened 0.3% against the U.S. dollar ahead of the announcement and was steady after the rate decision.

The rupiah is still up about 2% this year, but has come under pressure along with bonds amid rising U.S. Treasury yields and economic weakness in China.

And while Indonesia's second-quarter growth beat expectations due to higher consumption, the outlook for the remainder of 2023 remains bleak due to a contraction in exports while a general election early next year has held back investment.

Inflation slowed in July to 3.08%, roughly the midpoint of the central bank's 2% to 4% target range.

"BI signalled a preference to tap a confluence of intervention efforts, measures to draw more dollar inflows ... to address the more pressing currency depreciation pressures," said Radhika Rao, economist with DBS Bank, calling the rate decision "the middle path to balance stability and inflation priorities".

BI kept its 2023 economic growth forecast in a range of 4.5% to 5.3%, predicting inflation will be at 2.9% by year end and within a target range of to 1.5% to 3.5% in 2024.

"With inflation set to remain firmly within target and downside risks to the economic outlook elevated, we remain convinced that interest rate cuts will be starting from October," said Shivaan Tandon of Capital Economics.

Meanwhile, analysts at Bank Danamon said they expected the BI's monetary stance to remain neutral unless another Federal Reserve surprise rattles markets and causes a deep weakening in the rupiah.

(Reporting by Fransiska Nangoy and Bernadette Christina Munthe; Additional reporting by Stefanno Sulaiman, Ananda Teresia, Gayatri Suroyo; Editing by Martin Petty and Kim Coghill, Kirsten Donovan)