Indonesia seen holding key rate despite low inflation

* reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/cb-polls?RIC=IDCBRR%3DECI Poll data

* All 20 in the poll see BI keeping key rate at 6.00 pct

* February inflation rate lowest in almost a decade

* Analyst: Low inflation will bring forward easing expectations

* Decision due on Thursday, Mar. 21, around 0700 GMT

JAKARTA, March 18 (Reuters) - Indonesia's central bank is widely expected to keep interest rates unchanged for a fourth straight month on Thursday, despite inflation falling to its lowest pace in nearly a decade, a Reuters poll showed.

All 20 analysts in the poll predicted Bank Indonesia (BI) would keep its 7-day reverse repurchase rate at 6.00 percent.

BI was one of Asia's most aggressive central banks last year, raising the rate six times by 175 basis points to counter outflows that kept the rupiah under pressure for most of 2018.

But as Asian central banks, along with the U.S. Federal Reserve and the European Central Bank, are turning more dovish, a growing number of analysts are expecting BI's next move will be a cut.

Fueling the easing argument, February's annual inflation rate was 2.57 percent, the lowest since November 2009 and near the floor of BI's 2.5-4.5 percent target range.

Bank of America Merrill Lynch said the February pace "will not only bring forward easing expectations, but will also mean that there is bigger room for easing".

The bank saw "non-trivial likelihood" of easing before May, saying there is room for 75-100 bps in cuts, though it warned that an easing on Thursday risked being seen as stemming from political pressure ahead of Indonesia's April 17 elections.

For months, BI Governor Perry Warjiyo has said the benchmark level is "near its peak".

On Feb. 28, he said the direction of interest rates will be down - if financial system stability is maintained.

Last week, Morgan Stanley recommended investors buy Indonesia's 10-year sovereign bonds, predicting prices would rise when BI starts to bring rates down by 75 basis points in the third quarter.

"We think weakening USD and delayed Fed normalisation can set the stage for a BI policy rate unwind if domestic macro conditions are right, and we believe they are," its researchers wrote.

But Bahana Sekuritas analyst Satria Sambijantoro said discussions with officials indicate it might be too early to talk about cutting.

Bringing down Indonesian yield differentials by cutting rates "might not spur rallies", the Jakarta-based Sambijantoro said "but instead pose risks to the currency that eventually cause global fund managers to unwind their overweight position in Indonesian bonds."

The rupiah is up about 1 percent this year, reflecting portfolio inflows to Indonesia's equity and bond markets. (Polling by Nilufar Rizki, Gayatri Suroyo and Tabita Diela; Writing by Gayatri Suroyo; Editing by Richard Borsuk)

2019-03-18 10:09:08

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