(MENAFN- The Peninsula) Indonesia's central bank kept its key policy rate unchanged yesterday for the sixth straight meeting, as expected, saying the focus of monetary policy was maintaining the rupiah's stability.
Southeast Asia's largest economy is growing at its weakest pace in six years, but the central bank has to balance loosening policy to spur growth against financial market volatility and the risk of capital outflows when US interest rates rise.
Bank Indonesia (BI) kept its policy rate at 7.50 percent, where it has been since February's 25-basis-point cut. The overnight deposit facility and lending facility rates were also left at 5.50 percent and 8.00 percent, respectively.
"We are keeping a balance in maintaining stability and pushing for economic growth," said deputy governor Perry Warjiyo, adding that BI will respond to slower growth with an accommodative policy mix.
The rupiah, emerging Asia's second-worst performer, is "undervalued", central bank governor Agus Martowardojo reiterated. It slipped to 13,848 per dollar yesterday.
BI said it had been "desperately defending" the rupiah and will continue to maintain its presence in foreign exchange and bonds market. Its foreign exchange reserves stood at an "adequate" $107.6bn at end-July.
The central bank said it was optimising its monetary operations by mopping up short-term excess liquidity in the market so that traders can't use it to speculate against the rupiah.
It will conduct a foreign exchange swap with banks once a week instead of twice and will increase issuance of 6-month and 12-month Bank Indonesia certificates.
For those buying more than $25,000 over the counter, BI will also require more documents, representing a tightening of existing regulation. Weaker-than-expected trade data earlier on Tuesday provided more evidence of sluggish growth at the start of the third quarter as Indonesia's trade surplus sharply widened.
Exports in July slumped 19 percent to a three-year low, while imports tumbled 28 percent, the biggest fall since 2009.
Economists say the central bank has room to cut rates later this year as inflation cools, but adjustments will be gradual.
"The worst of the market reaction to China's "devaluation" appears to be over, but the rupiah is likely to come under further downward pressure as the Fed starts tightening monetary policy," Gareth Leather, Asia economist at Capital Economics said.
ING Financial Markets in a report ahead of the rate announcement forecast a combined rate cut of 250 basis points from December to end-2016, bringing the rate to 5 percent.
BI expects annual inflation to cool to around 4 percent by year-end from 7.26 percent in July.
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