JAKARTA (Reuters) - Indonesia's central bank held its benchmark interest rate on Thursday, as expected, and took steps to contain loan expansion to battle inflation without taking any more steam out of slowing economic growth.
Many economists do expect another rate hike later this year but the central bank faces a tricky combination of surging prices, a falling rupiah, a stubborn current account deficit and slowing economic growth.
Bank Indonesia "would like to normalize the economy by decelerating investment" to contain imports," said Destry Damayanti, chief economist at Bank Mandiri.
"BI wants to achieve a balanced macro economy so that growth is sustained and the trade deficit is reduced," she added.
Saying it was leaving its policy rate at 6.5 percent and overnight deposit facility rate (FASBI) at 4.75 percent, the central bank also announced several measures to trim loan growth.
It cut the ceiling on the loan-to-deposit ratios of commercial banks to 92 percent from 100 percent.
And it plans to increase the secondary minimum reserve requirement for rupiah deposits to 4 percent, from 2.5 percent at present.
The loan-to-deposit ratio is being changed "due to high loan growth and to strengthen loan disbursement," BI spokesman Peter Jacobs said.
The reserve change is for "strengthening the ability to counter risk as well as strengthening financial stability."
The central bank wants to rein in inflation - running at an annual rate of 8.61 percent in July, the fastest pace since early 2009 - without cutting growth which now looks likely to struggle to reach 6 percent, compared to a 6.3 percent government target.
On Thursday, BI said it expects 2013 growth to be at the "lower end" of its forecast range of 5.8-6.2 percent. Last month, it cut its projection to that range from 6.2-6.6 percent previously.
One factor in the slowing growth has been weak exports. In 2012, Indonesia had an annual trade deficit for the first time, and it is headed for another this year.
Wisnu Wardana, economist at Bank CIMB Niaga, said the moves to contain loan expansion will contribute to lower overall economic growth, but are a "positive step towards a sustainable external account, yet paving ways for more rate hikes in the future, if necessary."
President Susilo Bambang Yudhoyono on Friday will present the government's 2014 budget, which Finance Minister Chatib Basri told Reuters will emphasize raising domestic demand.
But increasing domestic demand can also push up inflation, which is the central bank's top target.
DETERIORATING FOREIGN RESERVES
Many analysts think BI later this year will raise the benchmark rate. Seven out of 11 economists polled by Reuters had expected it to hold the policy rate on Thursday, while three predicted a 25 basis point rise and one a 50 bps hike.
Thursday's policy meeting took place on the same day the rupiah slipped to its lowest level since June 2009 as it was weaker than 10,345 to the dollar. The fall came in the wake of Bank Indonesia's announcement late Wednesday that foreign reserves fell sharply again in July. In June and July, the reserves total dropped by more than $12 billion.
The rupiah fell further in the afternoon before the central bank's rate decision, after which it did not immediately change. The currency, which was down 0.5 percent on Thursday, has lost 6.9 percent against the dollar this year.
In June, BI became the first Asian central bank to raise interest rates since 2011. At meetings in June and July, it hiked the benchmark rate and the overnight deposit facility rate, known as FASBI, by a total of 75 basis points, on concern over high inflation and the depreciating rupiah.
(Additional reporting by Rieka Rahadiana and Andjarsari Paramaditha; Editing by Richard Borsuk and Jonathan Thatcher)
(c) Copyright Thomson Reuters 2013. Check for restrictions at: http://about.reuters.com/fulllegal.asp