As expected, Bank Indonesia (BI) reduced its benchmark policy rate by 25bps to 5.75%. It is BI’s first reduction since September 2017. Apart from reducing the benchmark policy rate, it also lowered both the lending and deposit facility rates by 25bps to 6.50% and 5.00% respectively. BI’s decision to reduce rates is in tandem with the need to support economic growth under an environment of low inflation. Meanwhile, the current account deficit/GDP is projected to narrow to 2.5%–3% in 2019 from 3.0% in 2018. This remains a potential source of vulnerability and the salient cause for BI to institute a total rate hike of 175bps to 6.00% since 2018.

Looking ahead, we believe there is still room for BI to further relax its monetary policy. Apart from focusing on growth, inflation and current account, the BI is of the view that the US Fed will most likely cut its policy rate by 50bps in 2019, compared with no rate cut previously. This will open the door wider for BI to also reduce its policy rate. We are maintaining our view of another two more rate cuts by BI in 2019, each by 25bps.

• As expected, Bank Indonesia (BI) reduced its benchmark policy rate by 25bps to 5.75%. It is BI’s first reduction since September 2017. Apart from reducing the benchmark policy rate, it also lowered both the lending and deposit facility rates by 25bps to 6.50% and 5.00% respectively.

• BI’s decision to reduce rates is in tandem with the need to support economic growth. It has projected that 2Q2019 GDP would grow around the same pace as in 1Q2019 by 5.07%. Furthermore, BI expects the full-year 2019 GDP to come in at the lower end of its 5.0%–5.4% target range. On its inflation expectation, BI foresees it to remain low. Inflation is projected to average below the midpoint of its 2.5%–4.5% target band. 1H2019 average inflation is 2.9% y/y.

• Meanwhile, the current account deficit/GDP is projected to narrow to 2.5%–3% in 2019 from 3.0% in 2018. This remains a potential source of vulnerability and the salient cause for BI to institute a total rate hike of 175bps to 6.00% since 2018. We expect the pressure on the current account deficit will likely to continue although the economy reported a small trade balance surplus for the second straight month in June which still brings 2Q2019 trade balance to a deficit.

• Looking ahead, we believe there is still room for BI to further relax its monetary policy. Apart from focusing on growth, inflation and current account, BI is of the view that the US Fed will most likely cut its policy rate by 50bps in 2019, compared with no rate cut previously. This will open the door wider for BI to also reduce its policy rate. We are maintaining our view of another two more rate cuts by BI in 2019, each by 25bps.

Source: AmInvest Research - 19 Jul 2019