Indonesia - Expect policy rate to stay stable

In line with our view and the consensus’, Bank Indonesia (BI) left the policy rate unchanged at 4.75%. The decision to hold rates came in the midst of an environment of stable growth and contained inflation. The 7?day reverse repo rate has remained unchanged since October 2016. We expect the economy to perform better going forward supported by consumption, investment and exports. At the same time, we foresee headline inflationary pressure emerging, coming from higher electricity and fuel prices. We maintain our view of a stable policy rate at 4.75% for the rest of 2017. Our full?year GDP projection for 2017 is still at 5.2% while the risk of inflation beating BI’s range of 3% – 5% is unlikely.

• In line with our view and the consensus’, Bank Indonesia (BI) left the policy rate unchanged at 4.75%. The decision to hold rates came in the midst of an environment of stable growth and contained inflation. The 7?day reverse repo rate has remained unchanged since October 2016.

• We expect the economy to perform better going forward supported by healthy consumption from the distribution of the Hari Raya allowance, while investment will be boosted by government infrastructure spending with improved fiscal revenue collection as well as exports.

• At the same time, we foresee headline inflationary pressure emerging, coming from higher electricity and fuel prices. However, the core inflation, as a pass?through effect from the administered prices, is still benign due to a not so strong demand condition.

• We maintain our view of a stable policy rate at 4.75% for the rest of 2017. Our full?year GDP projection for 2017 is still at 5.2% while the risk of inflation beating BI’s range of 3% – 5% is unlikely.

UK - Surprising outcome from Monetary Policy Committee

As expected, the Bank of England (BoE) maintained its policy rate at 0.25%. However, the surprise was an unexpected rise in favour for a rate hike among its committee members which could now mean that there is an increasing possibility of the BoE lifting rates much sooner than expected. It appears to us that the BoE’s key concern for now is on inflation as opposed to the outcome of the potential political scenario which may have a knock?on effect on its economic outlook. While our case scenario is still a no rate hike in 2017, we have now priced in a low 40% for a potential rate hike with the notion of no change to the bond?buying programme.

• As expected, the Bank of England (BoE) maintained its policy rate at 0.25%. However, the surprise was an unexpected rise in favour for a rate hike among its committee members which could now mean that there is an increasing possibility of the BoE lifting rates much sooner than expected.

• In our base case scenario, we expect the BoE to remain cautious following an inconclusive election results last week and its risky position ahead of Brexit talks. Hence, we felt the policy rate will remain intact for the rest of the year.

• However, in the recent monetary policy meeting, three BoE members known to be “hawks” were in favour for a 25 basis point (bps) hike, with the final decision at 5?3 in favour of no rate hike. Part of the reason for a growing pressure to raise rates is due to higher inflation which reached 2.9% in May, almost a four?year high and nearly a full percentage point higher than the BoE’s target. Nevertheless, the members unanimously maintained the corporate bond purchases at £10 billion and the government bond purchases at £435 billion.

• It appears to us that the BoE’s key concern for now is on inflation as opposed to the outcome of the potential political scenario which may have a knock?on effect on its economic outlook. While our case scenario is still a no rate hike in 2017, we have now priced in a low 40% for a potential rate hike with the notion of no change to the bond?buying programme.

Source: AmInvest Research - 16 Jun 2017