● Bank Indonesia (BI) yesterday held its 7-day repo rate unchanged after four consecutive rate cuts but slashed reserve requirement ratio (RRR) by 50 basis points (bps) (consensus: no change; KIBB: 50% probability of 25 bps cut)

- Both the Deposit Facility rate and Lending Facility rate maintained at 4.25% and 5.75% respectively. - RRR for conventional banks and Islamic banks were cut to 5.50% and 4.00% respectively effective from Jan 2, 2020.

● BI statement: Ensuring adequate liquidity and accommodative measures to preserve economic stability and boost domestic economic growth

- Monetary operations strategy remains oriented towards maintaining sufficient liquidity and facilitates the effective transmission of an accommodative policy mix.

- The macro-prudential policy remains accommodative to stimulate bank lending and enhance economic financing while also to strengthen payment system policy and financial market deepening.

- BI to support and enhance coordination with the Government and other relevant authorities to maintain economic stability, boost domestic demand, increase exports and tourism, alongside foreign capital inflows, including Foreign Direct Investment (FDI).

● Balance of Payments (BoP) improved in 3Q19, supporting Rupiah and reinforce Indonesia's external resilience

- Current account deficit shrank to USD7.7b or 2.7% of GDP in 3Q19 (2Q19: -USD8.2b or 2.9% of GDP) while registering a higher surplus in the financial account (USD7.6b; 2Q19: USD6.5b).

- Rupiah gained 2.1% year-to-date as of 20th November, driven by sustained foreign capital inflows as well as stable market mechanism.

- BI expects the Rupiah to remain stable backed by fundamentals and stable forex market mechanism.

● BI has ample room to resume rate cut to bolster growth going into 2020

- While there is no major breakthrough yet between the US and China to reach 'phase one' trade deal, we expect BI to resume the easing cycle in its last board of governor meeting for this year.

- Weak global demand and a relatively subdued inflationary trend would provide BI the policy flexibility to further ease its monetary policy.

Source: Kenanga Research - 22 Nov 2019