OVERVIEW

● As anticipated, Bank Indonesia (BI) decided to keep its 7-day repo rate unchanged at 6.00% yesterday, at its fourth Board of Governor (BoG) meeting this year, in line with Bloomberg consensus and house forecast. The central bank 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 the fifth consecutive meeting after raising rates by a cumulative 175 basis points between May and November last year in a bid to defend the Rupiah.

● Maintaining external stability. The central bank reiterated that the main aim of the monetary policy decision is to strengthen the external stability of the national economy, to reduce the current account deficit, supporting growth momentum via domestic demand, exports, tourism as well as attracting foreign capital inflows. Consequently, Rupiah has strengthened this year on the back of foreign capital inflows to the domestic market and a rebound in trade surplus.

● More accommodative measures to boost domestic demand. BI has also expanded its accommodative policies to stimulate domestic demand which includes; Strengthening monetary operations; Expanding National Clearing System (SKNBI) services; Simplifying the regulations specifically to underlying transaction via increase in the supply of Domestic Non-Deliverable Forward (DNDF); Implementing market operator regulation in the money market and foreign exchange market; Developing the Commercial Papers (SBK) market; and expanding electronification of non-cash.

● While its trade balance posted a USD0.5b surplus in March as exports’ expansion outpaced imports, and reserve assets continue to rise, we expect Indonesia's current account position to improve in 1H19 which in-turn would support the local currency and provide room for the central bank to cut interest rate. However, political uncertainties ahead of the actual count results from the recent presidential and legislative election may exert more downward pressure on the Rupiah. Additionally, policy changes post-election may lift inflation should President Jokowi decide to remove his populist policies on subsidies for fuel and food staples while resuming his ambitious construction spending, putting its current account balance of payments under pressure. This may give less leeway for BI to trim its policy rates at its upcoming monetary policy meetings. Hence, we maintain our outlook for BI to keep its policy rate steady at 6.00% till end of the year.

Source: Kenanga Research - 26 Apr 2019