OVERVIEW

● Expected. Bank Indonesia (BI) decided to keep its 7-day repo rate unchanged at 6.00% yesterday, at its third Board of Governor (BoG) meeting this year, in line with a unanimous prediction by analysts polled by Bloomberg. It also maintained the Deposit Facility rate at 5.25%, as well as the Lending Facility rate at 6.75%. BI’s latest decision means it has left rates on hold for four consecutive meetings after raising rates by a cumulative 175 basis points between May and November last year.

● Maintaining external stability. In a statement, the central bank reiterated that the main aim for the decision is to strengthen the “external stability”, reduce the current account deficit and maintaining the attractiveness of its domestic financial assets. Hence, the performance of the Rupiah is key to predict BI’s monetary policy direction. Given that the Rupiah has strengthened due to large inflows of portfolio funds it is hardly a surprise that BI has continued to put the brakes on monetary policy tightening and rates has remained steady since November last year.

● New accommodative monetary measures to stimulate demand. In its continuous effort to focus on external stability via interest rate and exchange rate policies BI has also introduced other accommodative policies to stimulate domestic demand namely: Regular and scheduled term-repo transactions in addition to FX Swaps to ensure ample liquidity; Raising the Macroprudential Intermediation Ratio (MIR) from 82-92% to 84-94% in order to boost credit financing to the corporate sector; Accelerating financial market deepening policy by strengthening market conduct through mandatory treasury certification for market players and encouraging use of hedging instruments, Rupiah Interest Rate Swaps (IRS) and Overnight Index Swaps (OIS), against domestic interest rate; and Strengthening payment system policy.

● BI in a sweet spot, rates likely to stay put for the year. With the central bank focussing on measures to encourage banks to lend more to boost the economy there is no urgency to lean on monetary easing in view of external uncertainties namely the impact of the US-China trade tension and the increasingly dovish US Federal Reserve. Along with the continued expectation that the Rupiah will continue its upward bias BI is in a sweet spot to maintain its monetary policy and to hold rates steady for the rest of the year barring unforeseen external shocks.

Source: Kenanga Research - 22 Mar 2019