Indonesia central bank holds rates as global uncertainties re-emerge

By Gayatri Suroyo and Stefanno Sulaiman

JAKARTA (Reuters) -Indonesia's central bank held interest rates steady on Wednesday as expected, aiming to keep inflation in check and the rupiah stable as it confronts rising financial market uncertainties.

That contrasted with rate cuts just minutes earlier from neighbours Thailand and the Philippines, although a majority of economists polled by Reuters expected Bank Indonesia (BI) to lower rates by year-end, building on a surprise reduction last month.

BI Governor Perry Warjiyo cited escalating tensions in the Middle East and the timing of expected rate cuts by the U.S. Federal Reserve among uncertain factors that could affect the strength and stability of the rupiah, which has been under pressure in recent weeks.

"The focus of short-term monetary policy is on the stability of the rupiah exchange rate due to increasing uncertainty in global financial markets," Warjiyo told reporters.

The central bank left the benchmark 7-day reverse repo rate at 6.00%, while keeping the overnight deposit facility rate at 5.25% and the lending facility rate at 6.75%.

"We now expect the next BI cut to hugely depend on the foreign exchange market situation around mid-November when the bank is set to have the next meeting," SMBC economist Ryota Abe said, adding that the bank would also have to consider the results of the U.S. presidential election.

The bank's rate cut last month came just ahead of the Fed's reduction. Since then, the rupiah has become more volatile against the U.S. dollar in line with a shifting outlook for further U.S. rate cuts and rising conflict in Middle East.

Warjiyo said Bank Indonesia retained its outlook for the Fed to cut rates in November and December by 25 basis points each.

"Should there be change to this, it is only a matter of timing," he said, adding that the impact of such changes would not be significant.

"The significant factor currently is the tension in the Middle East," Warjiyo added.

He said the central bank would continue to assess if there was room for further rate cuts, taking into account inflation, the rupiah's stability and the growth outlook.

Annual inflation in Southeast Asia's largest economy cooled to 1.84% last month, the lowest since 2021 and moving towards the lower end of Bank Indonesia's target range of 1.5% to 3.5%.

Indonesia's economic growth has held steady at a solid pace of 5% post-pandemic, but that is far below the 8% target indicated by Prabowo Subianto, who will be inaugurated as president on Sunday.

The central bank kept its outlook for economic growth at a range of 4.7% to 5.5% for this year, and said it expected growth to accelerate next year.

(Reporting by Gayatri Suroyo, Stefanno Sulaiman, Fransiska Nangoy and Ananda Teresia; Editing by John Mair and Edmund Klamann)