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UPDATE 1-Indonesia c.bank holds rates to underpin rupiah

* Key rate held at 4%

* C.bank has cut rates by 100 bps, bought bonds

* Governor reiterates quantitative easing to support economy

* Parliament presents 1st draft of c.bank law amendment bill

JAKARTA, Sept 17 (Reuters) - Indonesia’s central bank held its key interest rate unchanged on Thursday to keep the rupiah currency stable, as the governor stressed that quantitative easing was a better way to support an economy tipping into recession due to the coronavirus pandemic.

Bank Indonesia (BI) held the benchmark 7-day reverse repurchase rate steady at 4.00% for a second month running.

All 22 analysts in a Reuters poll had expected no change due to pressure on the rupiah, which has fallen nearly 2% this month amid concerns over the central bank’s independence after parliament examined recommendations to overhaul its operations and mandate.

The rupiah was flat after the rate announcement, while the main stock index was down 0.8%.

Governor Perry Warjiyo told a virtual news briefing the rate decision was taken to stabilise the rupiah and despite low inflation.

“To support economic recovery from the impact of the COVID-19 pandemic, BI is focusing on quantitative channels by providing liquidity, including BI’s support to the government,” Warjiyo said.

BI has resorted to unconventional policies to cushion the blow from the coronavirus pandemic, including by directly financing some of the government’s COVID-19 programmes. It has also trimmed its key rate four times, cut banks reserve requirements and eased lending rules so far this year.

Analysts are worried that the pandemic-led debt monetisation could be extended if parliament passes some of the proposals to amend a central bank law.

When asked about the deliberations in parliament, Warjiyo referred to President Joko Widodo’s and Finance Minister Sri Mulyani Indrawati’s pledge that monetary policy would remain independent.

Ahead of Thursday’s policy decision, parliament’s legislative body presented the first version of the draft for an amendment to the law, which included giving government ministers voting rights and allowing BI to finance fiscal deficits in emergency situations.

However, some MPs raised worries over provisions that could undermine BI’s independence, suggesting no consensus yet.

The policy meeting came days after Jakarta went into a semi-lockdown for the second time to contain the spread of the coronavirus, a policy that Sri Mulyani has warned could worsen the economic outlook.

Southeast Asia’s largest economy is set to enter a recession by the third quarter, according to officials estimates, which will be its worst performance since the Asian financial crisis.

“Looking ahead, there is little doubt that the economy is in need of further support,” Capital Economics analyst Gareth Leather said, underlining the economic impact of Jakarta’s restrictions, but also adding that further easing hinges on rupiah stability.

Indonesia reported a record daily increase in coronavirus infections on Wednesday taking its caseload to 228,993 and deaths to 9,100, the highest in Southeast Asia. (Additional reporting by Gayatri Suroyo Editing by Ed Davies and Simon Cameron-Moore)

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