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Author: AmInvest   |   Latest post: Tue, 19 Feb 2019, 09:47 AM

 

Indonesia – Room for BI to cut rates

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Bank Indonesia (BI) left its key benchmark rate unchanged for the second consecutive month. BI maintained its key rate, the 7-day reverse repo rate at 6% after hiking six times by a total of 175 basis points since May 2018. BI also kept the deposit facility and lending facility at 5.25% and 6.75% respectively. Despite holding rates, the BI maintained a rather hawkish tone.

In our view, BI is taking a breather from its rate hike aggressiveness. We reiterate our view that BI is close to ending its tightening cycle and not factoring in any rate hikes in 2019. In fact, there is more room for a rate cut in 2019 supported by: (1) a less aggressive rate hike by the US Fed, at 1 or 2 hikes; (2) a stronger rupiah after having fallen by around 6% in 2018 due to the emerging market rout; (3) moderate global growth: (4) inflation turning benign and is within the central bank’s target band of 2.5% to 4.5%; and (5) an upcoming presidential election where there is a need to support growth.

  • Bank Indonesia (BI) left its key benchmark rate unchanged for the second consecutive month. BI maintained its key rate, the 7-day reverse repo rate at 6% after hiking six times by a total of 175 basis points since May 2018. BI also kept the deposit facility and lending facility at 5.25% and 6.75% respectively. Despite holding rates, the BI maintained a rather hawkish tone.
  • In our view, BI is taking a breather from its rate hike aggressiveness. We reiterate our view that BI is close to ending its tightening cycle and not factoring in any rate hikes in 2019. BI went on an aggressive stance in 2018 on its rate hikes to help stabilize the rupiah after it dropped almost 6% against the USD to reach its lowest level in 20 years. With the currency on a firmer footing in 2019, having gained around 3% as the odds for the US Fed rate hike tightening has softened to 1 or 2 plus the BI’s proactive stance, we believe the policymakers can afford to embark on rate cuts in 2019.
  • Besides, global growth is envisaged to be moderate. Also, investors have injected about US$600mil into government bonds since the start of January. Inflation outlook remains benign for now. Consumer prices rose 3.1% y/y in December 2018, which is well within the central bank’s target band of 2.5% to 4.5%. But the current account deficit which exacerbated 2018’s outflows remains a key concern. Nevertheless, the deficit gap is expected to ease to 2.5% of GDP in 2019 from 3.0% deficit in 2018.
  • Furthermore, an upcoming presidential election is seen as a complicating factor. President Joko Widodo is keen to spur economic growth and keep a lid on cost-of-living pressures. The economy’s expansion of about 5% is still short of the 7% target Widodo set when he came to office in 2014. The GDP is projected to grow around 5.0%–5.4% in 2019, which falls within our projection of 5.3%.

Source: AmInvest Research - 18 Jan 2019

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