Possibility of a Rate Cut by Bank Indonesia in 2H2019

Indonesia’s headline inflation accelerated to 3.3% yoy in May from 2.8% in April, making this its fastest pace since April 2018, mainly due to Ramadan. Higher inflation was led by the increase in cost of food (4.1%), processed food, beverages and tobacco (3.8%), transportation, communication and finance (3.6%) and clothing (3.3%). Similarly, core-inflation rose to a near 2- year high of 3.12% yoy in May compared to 3.05% in April. In the coming months, we believe inflation could rise further due to festive season with the Eid-ul-Fitr in June. Despite this, we expect headline inflation to remain manageable and likely in Bank Indonesia’s (BI) target corridor of 2.5-4.5%. As a result, amid the uncertainties on the external front and global growth slowdown anticipated to impact on the domestic economy, Indonesian Finance Minister recently guided that BI could possibly ease its monetary policy. This would be in line with the recent policy rate cuts done by other central banks in Malaysia, the Philippines, India, Australia and New Zealand. BI has kept the benchmark interest rate unchanged at 6.0% since its last 25bps rate hike in November 2018. Furthermore, the rupiah has strengthened against the US dollar by 1.1% year-to-date, and if the global trade tension between US and China escalates further, we believe there is a possibility for BI to cut policy rates by 25bps in the second half of 2019.

Separately, in the Philippines, after four consecutive months of decline, export growth rose by 0.4% yoy in April from -1.8% in March. Imports declined by 1.9% yoy in April from a growth of 7.8% in March, its first contraction since December 2018. Despite the turnaround in export growth, trade deficit in April had widened to US$3.5bn from US$3.1bn in March. As Philippines’ top export continued to be electrical & electronic (E&E) products, we are cautious of the sustainability of the country’s turnaround in export growth, amid the recent downturn in global semiconductor sales for the fourth consecutive month from -13% in March to -14.6% in April. Furthermore, recent escalating trade tensions between US and China may also hinder a recovery in its export growth going forward given that the US and China account for 17.4% and 12.8% of exports, respectively.

Meanwhile, Singapore’s retail sales in April declined for the third consecutive month by 1.8% yoy from -0.9% in March. Nearly all retail industries registered a decline in sales expect for the wearing apparel and footwear industry. Going forward, we believe growth in retail sales to be slow and consumer sentiment to be weak. The Global Consumer Confidence Board survey on the country showed consumer confidence had dropped by four points to 92 in 1Q19 from 96 in 4Q18.

Source: Affin Hwang Research - 14 Jun 2019