Indonesia c.bank seen holding benchmark as it adopts new system

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(Corrects to clarify last c.bank rate cut was in June, not May)

* BI to formally make 7-day reverse repo a new benchmark

* 12 of 20 analysts say BI will keep new benchmark steady

* New benchmark should work better for economy - analyst

By Gayatri Suroyo

JAKARTA, Aug 18 Indonesia's central bank formally makes the 7-day reverse repurchase rate its new benchmark on Friday, and a slim majority of analysts believe the rate will be held steady on its debut.

Twelve of 20 analysts surveyed by Reuters predicted Bank Indonesia (BI) will keep the new benchmark at 5.25 percent, where the reverse repo rate has been since June.

The other eight pencilled in a 25-basis point cut to strengthen growth momentum after Indonesia's economy had better-than-expected 5.18 percent annual expansion in the second quarter.


On Friday, BI will halt use of a 12-month reference rate as its benchmark. That rate was cut four times in January-June, by a total of 100 bps.

Those cuts have had limited impact on Southeast Asia's largest economy, with weak loan growth picking up only modestly and commercial banks trimming lending rates slowly.

Having a new policy rate is BI's way to fix this, Gareth Leather of Capital Economics wrote.

"Unlike the reference rate, which is only a signalling tool and is not directly linked to market interest rates, cuts to the 7-day reverse repo rate should help to boost liquidity in the interbank market, and improve the transmission of monetary policy," said Leather, who predicted a cut on Friday.

But Juniman, Bank Maybank Indonesia's economist, sees a cut next month rather than Friday.

He predicted that while a lot of factors support trimming the new benchmark, BI will hold because "psychologically, the policy rate is already trimmed" with the 7-day reverse repo at 1 percentage point below the old benchmark.

LOW INFLATION RATE
Supporting a cut are July annual inflation of 3.21 percent, the lowest since December 2009, shrinkage of the current account deficit to 2 percent of gross domestic product (GDP) in April-June and a stable rupiah exchange rate.

Even without a cut, the benchmark shift should warrant a cut in the rate BI charges commercial banks for borrowing money overnight because BI said in April it would peg that rate 75 bps above the new benchmark.

BI has stressed the new benchmark and this new system were not meant as a policy easing.

Some economists think the next rate easing would be near year-end, letting BI monitor results of the government's tax amnesty programme and global developments.

"BI will want some certainty in the pace of interest rate increase by the Fed before cutting its rate again, like last year," said Akbar Suwardi, Bank Rakyat Indonesia's economist. (Additional reporting by Hidayat Setiaji; Editing by Richard Borsuk)

http://uk.reuters.com/article/indonesia-economy-rates-idUKL3N1AZ1QI

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