● Bank Indonesia (BI) yesterday cut its 7-day repo rate by 25 basis points (bps) to 4.75% in line with market and house expectation

- The Deposit Facility rate and Lending Facility rate were also reduced to 4.00% and 5.50%, respectively.

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

- Monetary operation remains oriented towards maintaining sufficient liquidity and supporting the transmission of an accommodative policy mix.

- The macro-prudential policy remains accommodative to stimulate economic financing in which BI will adjust the calculation of the Macroprudential Intermediation Ratio (MIR).

- Strengthening the payment system policy to support growth momentum through digital economic and financial transformation.

- Adding the effort to mitigate the impact of COVID-19, apart from its continued effort to strengthen coordination with the Government and other relevant authorities to preserve economic stability, boosting domestic demand, and accelerate structural reforms.

● Weak growth outlook in the near term hampered by COVID-19 outbreak

- BI less optimistic over the global economic recovery process which has been dragged by the coronavirus outbreak forcing BI to revise down its global growth outlook to 3.0% from 3.1% and further projecting lower domestic economic growth in 2020 to 5.0-5.4%, slightly lower from an initial target range of 5.1-5.5%. The central bank had slashed its benchmark interest rate by 100bps and cut the reserve requirement for banks last year in a bid to shore up GDP growth, but overall growth moderated to 5.02% (2018: 5.17%).

- Rupiah appreciated in January by an average of 2.1% MoM (Dec 19: 0.4%) but soften in early February on negative sentiment amid fears of the COVIDs-19 outbreak. Nonetheless, BI predicts Rupiah's stability in line with its fundamental value and maintained market mechanisms.

- BI revised down its loan growth to 9-11% this year from an initial target range of 10-12%, albeit expanding compared to 6.1% last year, which could be supported through adjustment in MIR rule.

● Interest rate outlook maintained; another rate cut in 2Q20 to bolster growth going forward

- In spite of not even a single confirmed case reported in Indonesia so far, the house view that February’s rate cut is timely, amid increasing concerns of the COVID-19 fallout. The 25bps reduction would partially mitigate the potential damage on tourism, trade, investment channel, and overall growth for 2020.

- Rupiah's stability, low and stable inflation, as well as continued weakness in global growth weighed by the virus outbreak, would provide support for BI to embark on another 25bps rate cut potentially in the 2Q20.

Source: Kenanga Research - 21 Feb 2020