* BI keeps policy rate at 3.50% * Improved consumption, robust exports helping the recovery- BI * Domestic demand remains “far below” potential output - governor * Central bank expects narrower current account deficit in 2021 (Adds details, quotes, analyst comment) JAKARTA, Oct 19 (Reuters) - Indonesia’s central bank kept its policy rates steady at record lows on Tuesday to support a tentative recovery, even as economic activity picked up in recent months thanks to rebounding consumption and robust commodity exports. Bank Indonesia (BI) held the benchmark 7-day reverse repurchase rate steady at 3.50% for the eighth month, saying the decision was in line with the need to support the recovery while keeping the rupiah stable. All 29 analysts in a Reuters poll had expected the move. While the central bank said the domestic recovery was being buoyed by strong exports and improving consumption after a recent easing of coronavirus curbs, it stuck to its forecast for 3.5% to 4.3% growth this year. “Economic conditions have improved, but the domestic demand is still far below potential output ... That’s why the interest rates will remain low this year and liquidity will remain loose,” said Governor Perry Warjiyo. He also said the central bank would continue to allow banks to give out loans for the purchase of vehicles and properties without requiring a downpayment next year to support demand. Meanwhile, the resources-rich country was benefiting from a surge in exports on the back of booming commodity prices. Indonesia’s trade surplus was larger than expected in September, according to recent government data. Against this backrop, BI revised its outlook for the current account deficit this year, expecting it to be between 0% and 0.8% of gross domestic product (GDP) from a previous range of 0.6% to 1.4% of GDP. Booming exports have also underpinned the rupiah, which has gained around 1.1% against the dollar since the BI’s last meeting, but is still down 0.3% on the year. Warjiyo said Indonesia’s more favourable external balance position meant it was better prepared to withstand any global market volatility that may be triggered by U.S. tapering. Talk that the Federal Reserve would begin reducing bond purchases weighed on the rupiah earlier this year, raising concerns of a rerun of the so-called “taper tantrum” of 2013, when the rupiah fell more than 20% due to a U.S. tapering announcement. Analysts did not expect any more rate cuts this year, nor did they expect rate hikes given the country’s benign inflation outlook. The central bank expects 2021 inflation at below the midpoint of its 2%-4% target range. “In our base case, we expect BI to normalise the policy rate by 50 basis points in 2022 as the growth recovery firms,” Morgan Stanley said in a note. Warjiyo reiterated that BI would start any monetary tightening by reducing the amount of liquidity it injects into the financial system, with the central bank only likely to start discussing rate changes in late 2022. Since the pandemic started, BI has cut interest rates by a total of 150 basis points and launched a quantitative easing programme. Reporting by Fransiska Nangoy; Editing by Ana Nicolaci da Costa