● Bank Indonesia (BI) yesterday decided to cut its 7-day repo rate by 25 basis points (bps) to 5.25%, at its ninth Board of Governor (BoG) meeting this year. This is the third rate cut within three months in line with consensus and house forecast. The central bank also cut the Deposit Facility rate by 25 bps to 4.50%, as well as the Lending Facility rate by 25 bps to 6.00%. According to BI, the latest decision is a pre-emptive measure to drive up domestic growth momentum amid slowing global growth, while inflation outlook remains low below the midpoint of 2.5-4.5% target range. Meanwhile, domestic financial assets remained attractive as shown by higher investment returns which has been supporting the Rupiah.

● Ensuring adequate liquidity and accommodative measures to preserve economic stability and boost domestic economic growth. BI reiterated that its monetary operations strategy remains oriented towards maintaining sufficient liquidity and improve money market efficiency. Besides, the macroprudential policy remains accommodative to encourage new bank lending and demand for business credit. This includes improving the Macroprudential Intermediation Ratio (MIR), relaxing the loan-to-value (LTV) and financing-tovalue (FTV) ratio for property loans, green property loans, as well as on down payment for motor vehicle loans. BI also reiterated to support and enhance coordination with the Government and other relevant authorities to maintain economic stability, encourage domestic demand, increase exports, tourism, and foreign capital inflows, including Foreign Direct Investment (FDI).

● As a result, it partly helped to strengthened the Rupiah by 1.0% MoM in September. Year-to-date, Rupiah gained 2.3% driven by increased foreign capital inflows and heightened forex transaction for business. Going forward, BI expects the Rupiah to remain stable underpinned by the prospect of sustain foreign capital inflow backed by favorable domestic economic outlook and the prospect of attractive returns from financial instruments.

● BI has ample room for another rate cut to bolster growth. BI sees GDP growth at 5.1% this year,as slowing global economic conditions weighed its domestic growth. While the outlook on inflation and Rupiah remains stable supported by sustain inflow of foreign capital, we foresee that the central bank may continue to lean on easing with another 25 bps cut by year-end. BI has another three more BoG meeting this year. Growth concerns remain key reason over currency stability, as BI is expected to front-load its bullet to safeguard against the impact of global growth slowdown arising from ongoing US-China trade tensions.

Source: Kenanga Research - 20 Sept 2019