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AmInvest Research Reports

Author: AmInvest   |   Latest post: Mon, 14 Oct 2019, 10:26 AM

 

Indonesia – BI expected to stay cautious on rate cut

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As expected, Bank Indonesia (BI) left its benchmark interest rate unchanged for the fourth month. The 7-day reverse repurchase rate was left at 6.00%. It is in line with the efforts of Indonesia to strengthen its external stability, especially to control the current account deficit and maintain the attractiveness of domestic financial assets.

We expect BI to remain cautious with regards to reducing the policy rate much faster. It will be working to support domestic demand and at the same time narrow its current account deficit in support of the rupiah. So, we continue to reiterate our view that BI would apply supportive macro-prudential measures to lift domestic demand. That means a policy rate cut will not be anytime soon. The earliest could be sometime late 2H2019, but more evidently in 2020.

  • As expected, Bank Indonesia (BI) left its benchmark interest rate unchanged for the fourth month. The 7-day reverse repurchase rate was left at 6.00% is in line with the efforts to strengthen their external stability, especially to control the current account deficit and maintain the attractiveness of domestic financial assets.
  • BI is staying cautious due to its current account deficit and the economy’s vulnerability to currency swings. The deficit that reached a four-year high of 3% GDP in 2018 was the main reason causing Indonesia to experience a strong knock in the emerging-market rout. In 2018, BI raised the rate a total of 175 basis points in a move to head off a market rout in developing economies and a slump in the currency due to tighter US monetary policy.
  • Meanwhile, the Fed has turned more dovish after 2018’s tightening spree. It has provided more breathing space for Asian central banks with a growing scope to reduce rates in a move to support growth under a low inflation environment.
  • We expect BI to remain cautious with regards to reducing the policy rate much faster. It will be working to support domestic demand and at the same time narrow its current account deficit in support of the rupiah. So, we continue to reiterate our view that BI would apply supportive macro-prudential measures to lift domestic demand. That means a policy rate cut will not be anytime soon. The earliest could be sometime late 2H2019, but more evidently in 2020.

Source: AmInvest Research - 22 Mar 2019

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