- 7-day reverse repurchase rate unchanged at 5.75%
- New incentives cut FX hedging costs with the central bank
- Rupiah firmed slightly after decision, near 18,000 per dollar
JAKARTA, July 22 (Reuters) - Indonesia's central bank kept policy rates unchanged on Wednesday, defying market expectations of another rate hike following back-to-back increases aimed at supporting the rupiah currency, but it offered new incentives to attract foreign capital inflow.
Bank Indonesia left the 7-day reverse repurchase rate unchanged at 5.75%. Twenty of 33 economists polled by Reuters had expected another 25-basis-point hike, while the rest had predicted no change. It also kept its two other policy rates unchanged.
BI has raised rates by a total of 100 basis points since May in a bid to attract foreign inflows to shore up the rupiah, which has come under pressure amid concerns about Indonesia's fiscal health, the independence of its central bank and controversial commodity export policies.
The rupiah strengthened a touch to 17,875 per dollar as of 0855 GMT, versus 17,898 before BI's press conference.
Since falling to an all-time low of 18,190 a dollar on June 8, the rupiah has recovered but continued to trade near the 18,000 mark.
Instead of another hike, BI offered incentives including reducing the cost of FX hedging transactions with the central bank and encouraging the use of currencies other than the U.S. dollar to aid the rupiah, Governor Perry Warjiyo said during the online press conference.
"Today BI had two options: increase the BI rates with the consequence that domestic rates will also increase, or what we decided to do today, which is not to hike rates but increase incentives to attract the flow of foreign portfolio," he said.
"These incentives are more effective to attract foreign investment and control the exchange rate without impacting domestic interest rates. This is what we chose," Warjiyo said.
BI SEEN PRESERVING POLICY SPACE IN CASE OF FUTURE VOLATILITY
On top of domestic concerns, the war in Iran and its impact on oil prices have also triggered outflows from Indonesia, a net-oil importing country. Warjiyo said the recent re-escalation in the Middle East has increased global uncertainty.
"BI likely chose to preserve policy space to respond should rupiah volatility intensify, either due to a further escalation in geopolitical tensions or a repricing of U.S. Fed tightening risks by financial markets," DBS economist Radhika Rao said, maintaining her view BI could deliver another hike in the second half.
Many central banks in both emerging and developed markets around the world have begun raising rates to contain inflation stemming from the conflict in the Middle East.
Warjiyo said he remained certain that Indonesia's inflation rate would stay within BI's 1.5% to 3.5% target range until 2027, with core inflation under 3%, even as he flagged risks from the impact of the El Nino weather pattern on food prices. Inflation in June was 3.34%.
BI also introduced changes to its liquidity policy intended to address uneven distribution among banks. On aggregate, banks have "more than enough" for lending, BI officials said.
BI kept its GDP growth outlook within the 4.9% to 5.7% range this year.
Reporting by Gayatri Suroyo, Stefanno Sulaiman, Fransiska Nangoy; Editing by David Stanway, Alexandra Hudson
Source: Reuters