Indonesia central bank, facing tough decision, seen cutting key rate

By Gayatri Suroyo

JAKARTA (Reuters) - A slim majority in a Reuters poll expects Indonesia's central bank, under pressure from the government to help lift economic growth, to cut its benchmark interest rate again on Thursday.

The decision will be announced shortly after a policy meeting of the Federal Reserve, which is widely expected to keep U.S. rates steady.

Bank Indonesia (BI) cut the key rate by 50 basis points (bps) at policy meetings in January and February. It has also slashed a reserve requirement ratio, saying this gives banks the ability to lend an additional 52 trillion rupiah ($3.95 billion).

Thirteen out of 22 analysts in the poll forecast BI to cut the key rate another 25 bps to 6.75 percent, while the other nine saw a pause in easing.

Analysts are also divided on longer-term monetary policy. Capital Economics, who sees a cut on Thursday, said BI then may want to exercise caution by assessing all loosening before making another move.

Economist Wellian Wiranto of OCBC thinks that with the February inflation rate still "relatively tame" at 4.42 percent and the currency market calm, BI will cut on Thursday and soon make another trim.

ING Financial Markets sees the key reference rate at 6 percent at the end of 2016 although it pencilled in a hold for Thursday.

In 2015, Indonesia's economic growth was 4.8 percent, the slowest in six years, and the government expects BI to increase its support for increasing the pace.

HOW LOW CAN IT GO?

Late last month, Coordinating Minister for Economics Darmin Nasution said the government has told BI to consider cutting its policy rate to 4-5 percent to help drive down banks' lending rates.

An official of BI, which by law is independent, said last month that the policy rate cannot be cut to 4 percent if inflation is 4 percent.

Kartiko Wirjoatmojo, finance director at Bank Mandiri (JK:BMRI), Indonesia's biggest bank by assets, said BI's key rate needed to be lowered for commercial banks to reduce their lending rates.

"BI should be able to bring down its key rate gradually to 5-6 percent if inflation stabilizes around 4 percent," Wirjoatmojo said.

On Tuesday, the International Monetary Fund said BI's monetary policy has been "appropriate" adding that its easing cycle should be "gradual and cautious to safeguard financial stability".

One reason BI maintained a tight money policy in 2015 was to support the rupiah , which that year weakened 10 percent against the dollar. This year, the rupiah has strengthened about 4.7 percent.

($1 = 13,168 rupiah)