By Kimberley Kao and Fabiana Negrin Ochoa


SINGAPORE--Indonesia's central bank stood pat at its May policy meeting, a widely expected decision as policy makers keep an eye on rupiah stability and inflation against an uncertain backdrop.

Bank Indonesia kept its benchmark seven-day reverse repo rate at 6.25%. All seven economists polled by The Wall Street Journal had expected the decision.

The central bank also held its overnight deposit facility rate at 5.50% and its lending facility rate at 7.0%.

The decision is a "pre-emptive and forward-looking step" to keep the rupiah stable, and inflation within the target range of 1.5% to 3.5% both this year and the next, Bank Indonesia Gov. Perry Warjiyo said at a press conference Wednesday.

The rupiah weakened slightly after the rate announcement, and continues to hover above the psychological level of 16,000 against the dollar.

Economists largely expect the central bank to move cautiously after delivering a surprise rate hike in April to stabilize a tumbling currency. The rupiah has since clawed back some ground against the dollar, easing pressure on Indonesia's policy makers to act.

Like other central banks in Asia, Bank Indonesia has been grappling with a strong dollar and shifting market expectations about the start of rate cuts by the U.S. Federal Reserve, widely viewed as the tipping point for the beginning of monetary loosening in much of the region.

Bank Indonesia will likely be wary about starting its rate-cutting cycle too soon and risk adding more pressure on the rupiah. On the other hand, keeping policy settings too tight for too long could hinder growth, restricting domestic demand that has been a key engine for the economy.

For now, it seems policy makers are comfortable with the current policy settings, even after first-quarter growth data showed signs that high borrowing rates are taking a toll.

The central bank on Wednesday kept its economic growth forecast for 2024 at 4.7%-5.5%. That would compare with 5.05% in 2023.

Economists mostly view another Bank Indonesia rate hike this year as unlikely. Calls are for the next move to be down, not up, barring a currency or growth shock.

Comments from Thursday's press conference suggest that the May hold is the end of the tightening cycle, said Gareth Leather, senior Asia economist at Capital Economics.

Currency stability and a favorable mix of domestic developments lowers the need to tighten policy further, DBS economists said in a recent note.

A slowdown in growth could usher in the start of easing, though a lot depends on the Fed and how the rupiah fares.

Of all the central banks in emerging Asia, Bank Indonesia is the most currency-focused despite its pro-growth leanings, Barclays economists said in a report. That means that for BI, U.S. monetary policy likely weighs heaviest.

The Indonesian central bank continues to view the most likely scenario as the Fed lowering rates by 25 basis points in the final quarter of the year, Barclays economist Brian Tan said. BI Gov. Warjiyo said the bank feels the April hike was enough to attract capital flows, strengthen the IDR, and keep inflation within target.

If the rupiah stays relatively stable or even appreciates, "BI would likely be happy to conserve its firepower," Tan said.

But renewed depreciation could put potentially put a hike back on the table.

"BI will do what it takes to cement its credibility when it comes to defending the currency," Tan said.


Write to Kimberley Kao at kimberley.kao@wsj.com


(END) Dow Jones Newswires

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