OVERVIEW

● Bank Indonesia (BI) yesterday decided to keep its 7-day repo rate unchanged at 6.00%, at its sixth 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 to defend the Rupiah in the wake of US Fed rate hikes. Meanwhile, BI has decided to reduce the reserve requirement for conventional and Islamic banks by 50 basis points (bps) to 6.0% and 4.5% respectively, effective on July 1, 2019 pointing to weak outlook going forward driven by uncertainties from the external sector. The dovish tone from the central bank indicates a possibility of a rate cut going forward as global growth slowdown and escalating trade tensions to weigh on the domestic economy.

● Ensuring adequate liquidity and accommodative measures to preserve economic stability and boost domestic economic growth. The central bank reiterated that the current monetary operations strategy is to ensure ample liquidity while maintaining an accommodative macroprudential policy stance which includes; catalyse bank lending and expand financing; bolster payment system policy; financial market deepening efforts; and strengthening coordination with the government and other relevant authorities in order to stimulate domestic demand, increase exports and tourism as well as attracting foreign capital flows. As a result, the Rupiah strengthened in June gaining 0.4% year-to-date, thanks to solid domestic economic outlook supported by its sovereign rating affirmed by Standard & Poor (S&P) to BBB from BBB- with a stable outlook, while dovish tone from the US Fed, European Central Bank, and regional central banks lifted the currency. Meanwhile, inflation was kept under control and below seasonal trends during the holy fasting month of Ramadan and Eid-ul-Fitr in June.

● Easing pressure builds up. With the central bank current focus on accommodative measures along with the government’s effort to boost the economy, we foresee no urgency for BI to cut its key rate in the near-term. This is further backed by the projection of solid domestic consumption, backed by sustained purchasing power, and rising public confidence amid slowing imports due to limited domestic demand contained by weak Rupiah and higher import duty. Besides, the coordinated efforts with the government to encourage economic growth and maintaining price stability would support growth momentum in the near-term. However, as the US Fed now turned dovish with the prospect of one rate cut this year possibly as early as in July, and its neighbours namely Malaysia and Philippines already cut interest rates, there is a possibility that BI would follow suit. Should the external sector continue to drag down the economy further, we expect the central bank has enough room for one rate cut in 3Q19.

Source: Kenanga Research - 21 Jun 2019