● Bank Indonesia (BI) yesterday kept its 7-day repo rate unchanged for the second straight month (consensus: no change; KIBB: 50% probability of 25 bps cut)

- Both the Deposit Facility rate and Lending Facility rate remained at 4.25% and 5.75%, respectively.

● 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 to facilitate the transmission of an accommodative policy mix.

- The macro-prudential policy remains accommodative to stimulate loan growth while strengthening the payment system policy and financial market deepening.

- BI to strengthen its coordination efforts with the Government and other relevant authorities to maintain economic stability, boosting domestic demand, increase exports and tourism, as well as attracting foreign capital inflows, including Foreign Direct Investment (FDI).

● Improved domestic economic outlook, but signalled easing bias via its accommodative policy stance

- The Balance of Payments (BoP) is expected to improve in 4Q19, due to an expected gain in the capital and financial account surplus, as well as a manageable current account (CA) deficit. CA deficit is projected to narrowed to 2.7% of GDP in 2019 (2018: -2.9 of GDP) and then at the range of 2.5-3.0% of GDP in 2020.

- Rupiah gained 2.9% year-to-date as of 18th December, supported by sustained foreign capital inflows and partly due to a monetary policy shift towards easing in the advanced economies.

- BI expects GDP growth to moderate to 5.1% in 2019 (2018: 5.2%) and rebound within the range of 5.1-5.5% in 2020, supported by loan growth which is projected to grow between 10-12% in 2020 (Oct 2019: 6.5%).

● BI has ample room to resume rate cutting measures to bolster growth in 2020

- The central bank may slash 25 basis points (bps) as soon as in 1Q20 in a bid to prop up the growth momentum going forward. Overall, we foresee BI to cut up to 50 bps in 2020.

- Stable inflation due to lower commodity prices and expectation of weaker demand as well as a stronger Rupiah on the back of sustain capital inflows may support the case of more easing.

- While the US and China have somewhat reached a phase-one trade deal, uncertainties remains over the global economic outlook in part due to Brexit developments, ongoing geopolitical risks and the prospect of a slowdown in key major markets, which invariably would provide BI the flexibility to further ease its monetary policy.

Source: Kenanga Research - 20 Dec 2019