Indonesia

Room for further rate hike

In line with our expectations, Bank Indonesia (BI) raised its seven-day reverse repo rate by 25bps to 5.50%, marking a total of 125bps hike since mid-May. Also, both the lending and deposit facility rates were lifted by 25bps to 6.25% and 4.75%, respectively.

The decision to raise rates is being viewed as pre-emptive in the wake of Turkey’s crisis, which is seen to be adding to BI’s woes, dragging down rupiah 7.92% YTD. The currency is already being hit by an emerging-market rout triggered by higher US interest rates and a stronger dollar. There is room for further rate hike by BI to support the weak rupiah, stem capital outflow and help regain investor confidence.

• In line with our expectations, Bank Indonesia (BI) raised its seven-day reverse repo rate by 25bps to 5.50%, marking a total of 125bps hike since mid-May. Both the lending and deposit facility rates were increased by 25bps to 6.25% and 4.75%, respectively.

• The decision to raise rates is being viewed as pre-emptive in the wake of Turkey’s crisis, which is seen to be adding to BI’s woes, dragging down rupiah 7.92% YTD. The currency is already being hit by an emerging-market rout triggered by higher US interest rates and a stronger dollar. The current account deficit at 3.0% of GDP in 2Q2018 and falling reserves further supported for aggressive rate hike.

• Room for further rate hike by BI is on our cards. We believe BI is doing all it can to support the weak rupiah, stem capital outflow and help regain investor confidence. We expect the risk of global financial market uncertainty and monetary tightening remain high until the end of this year.

UK

Inflation & wage data unexciting for consumers

Inflation rate picked up for the first time in 8 months in the month of July with headline inflation up 2.5% y/y, largely driven by higher transportation cost and food & non-alcoholic beverages. Core inflation grew at the same pace as in June by 1.9% y/y. Meanwhile, the labour market posted mixed results with the unemployment rate in June down to a new 43-year low to 4.0% while wage growth fell steadily over recent months from 2.8% in February to 2.4% in June

We believe the latest numbers put a dampener on households. With the recent fall in the pound, it will lift the price pressures on import cost, including fuel. Hence, inflation may remain sticky around the current levels in the near term. But the already weak wage growth will be further eroded by high prices which are expected to weigh down consumer spending. It will pose fresh problems for embattled businesses.

• Inflation rate picked up for the first time in 8 months in the month of July. Headline inflation rose 2.5% y/y in July from 2.4% y/y in June, largely driven by higher transportation cost and food & non-alcoholic beverages, which climbed 5.7% y/y and 2.3% y/y in July from 5.5% y/y and 2.0% y/y in June respectively. Meanwhile, core inflation grew at the same pace as in June by 1.9%y/y.

• The labour market however posted mixed results. The unemployment rate fell to a new 43-year low to 4.0% in June from 4.2% in May. Meanwhile, wage growth fell steadily over recent months from 2.8% in February to 2.4% in June.

• We believe the latest numbers put a dampener on households. With the recent fall in the pound, it will lift price pressures on import cost, including fuel. Hence, inflation may remain sticky around the current levels in the near term. But the already weak wage growth will be further eroded by high prices which are expected to weigh down consumer spending. It will pose fresh problems for embattled businesses.

Source: AmInvest Research - 16 Aug 2018