We believe Bank Indonesia is less worried of triggering further weakness in the currency by cutting interest rates just when the US Fed is talking about tightening its policy. Despite both the inflation and credit growth slowing down, the central bank reduced the policy rate by 25bps to 4.50%. The lending and the deposit facility rates were also lowered by 25bps each to 5.25% and 3.75% respectively.

In our view, Bank Indonesia will now adopt the wait-and-see stance by assessing the forthcoming data to justify if more easing measures are needed. We feel softer inflation data, especially if it falls below the 3%-5% target, and weaker incoming growth, which stays way below the President's target growth of 7%, may open the door wider for the central bank to make the next move in the coming central bank meeting.

Aside from a rate cut, there are possibilities for the central bank to adopt alternatives such as macro-prudential easing like reducing the loan-to-value ratios for housing or reducing down payments for car loans.

• Despite both the inflation and credit growth slowing down, the central bank decided to lower the policy rate by 25 basis points to 4.50%. Furthermore, the threat of capital outflows from higher US interest rates has been easing. Bank Indonesia has been holding its benchmark rate since its last reduction in October. The lending and the deposit facility rates were also lowered by 25bps each to 5.25% and 3.75% respectively.

• We believe Bank Indonesia is fairly confident of not triggering further weakness in the currency by cutting interest rate though the US Fed is talking about further tightening its policy. The rupiah has been performing fairly stable against the USD where it had gained 0.9% since the start of January. Although the currency acts as a policy-easing measure and has helped keep inflation pressures at bay, the limited growth, as export growth of manufactured goods remains sluggish, has prompted the central bank to cut rates.

• In our view, Bank Indonesia will now adopt the wait-and-see stance by assessing the forthcoming data to justify if more easing measures are needed. We feel softer inflation data, especially if it falls below the 3%-5% target, and weaker incoming growth, which stays way below the President's target growth of 7%, may open the door wider for the central bank to make the next move in the coming central bank meeting.

• Aside from a rate cut, there are possibilities for the central bank to adopt alternatives such as macro-prudential easing like reducing the loan-to-value ratios for housing or reducing down payments for car loans.

Source: AmInvest Research - 23 Aug 2017