OVERVIEW

● Bank Indonesia (BI) decided to keep its 7-day repo rate unchanged at 6.00% yesterday, at its fifth 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 sixth straight meeting after raising it 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 maintain the external stability of the national economy, stimulate economic growth via domestic demand as well as boost exports, tourism and attracting foreign capital inflows. As a result, the balance of payments recorded a surplus of USD2.4b in 1Q19 (4Q18: USD5.4b), which has reinforced external stability aimed by the central bank. Meanwhile, the Rupiah fell by almost 2.0% in the past month as of 15th May 2019 under renewed pressure from negative global sentiment on concern of the US-China trade war and amplified by higher demand for foreign exchange for nonresident dividend payments.

● Ensuring adequate liquidity and accommodative measures to preserve economic stability and boost domestic economic growth. BI has expanded its accommodative policies to stimulate domestic demand which includes; holding the countercyclical capital buffer (CCyB) at 0%; Macroprudential Liquidity Buffer (MPLB) at 4.0% with flexible repos at 4.0%; Macroprudential Intermediation Ratio (MIR) in the 84-94% range; strengthen payment system policy and financial market deepening; and strengthen coordination with the Government and other relevant institutions.

● BI in a sweet spot, rates likely to stay put for the year. With the central bank focussing on accommodative measures to boost the economy, we foresee no urgency for BI to lean on monetary easing though its neighbours namely Malaysia and Philippines have cut interest rates recently. This is mainly due to the fact that its current account remains in deficit albeit slightly narrowing while its trade balance posted a record high deficit of USD2.5b in April. With global financial uncertainties remains elevated in particular the trade tug of war between the US and China along with expectation on seasonally higher inflationary pressure during the holy fasting month of Ramadan and Eid-ul-Fitr, BI is in a sweet spot to maintain its monetary stance and to hold rates steady for the rest of the year barring unforeseen external shocks.

Source: Kenanga Research - 17 May 2019