BI Cited Manageable Inflation and Only Gradual Increase in US FFR

Bank Indonesia (BI) unexpectedly cut its benchmark interest rate i.e. the seven-day repo rate, by 25bps from 4.75% to 4.5% in the Monetary Policy Committee (MPC) meeting this week. This was the first reduction in policy rate since October 2016. BI also cut its deposit and lending facility rates by 25 bps to 3.75% and 5.25% respectively.

BI highlighted that the policy rate easing is expected to reinforce intermediation in the banking sector to strengthen financial system stability as well as support stronger economic growth. BI also noted the country’s low inflation with 2017 and 2018 inflation projected within the target range. Interesting to note, on the external risks, BI highlighted that the Fed hiking its Fed Funds Rate (FFR) and unwinding its balance sheet, have decreased, resulting in the still-attractive domestic interest rate in Indonesia, compared to the external interest rate. As a result, in view of its assessment on the US monetary policy and domestic inflation trend, we believe BI will likely leave its benchmark interest rate unchanged at 4.5% throughout 2017.

Separately, in Thailand, the country’s real GDP growth exceeded market expectations in the second quarter and rose sharply by 3.7% yoy (3.3% in 1Q17), the strongest quarterly growth in the past four years. The economic growth was supported by a surge in government consumption (2.7% yoy vs 0.3% in 1Q17). Despite the slowdown in household consumption, the pickup in public spending raised total consumption growth to 2.9% yoy in 2Q17 from 2.5% in the previous quarter. On the other hand, private investment expenditure expanded by 3.2% following a decline of 1.1% in 1Q17, primarily due to an increase of investments in machinery and equipment, and construction sector. The construction of non-residential buildings also continued to rise due to the expansion of hospital and hotels projects. On the external front, in line with the improvement of the global economy, Thailand’s exports rose by 6.0% yoy in 2Q17 compared with 2.7% in the first quarter. This was mainly due to an expansion of merchandised exports in agriculture and manufacturing.

By production, the service sectors related to tourism, including hotels and restaurants, transport and communication, and trading activities recorded favourable growth rates during the quarter. However, the manufacturing sector, which accounts for 27.2% of GDP, slowed by 1.0% yoy in 2Q17 vs 1.3% 1Q17, due partly to the contraction in the vehicle, metal and non-alcohol beverage production. With steady growth in 2Q17, the National Economic and Social Development Board have revised its expected GDP growth this year to 3.5-4.0%, as compared to the previous projection of 3.3-3.8% in May.

Source: Affin Hwang Research - 25 Aug 2017