● Bank Indonesia (BI) yesterday maintainedits 7-day repo rate at 4.50% in line with house expectation (consensus: 25bps cut)

- The Deposit Facility rate and Lending Facility rate were also maintained at 3.75% and 5.25%, respectively.

● BI statement: The decision was to maintain exchange rate stability amid heightened global financial market uncertainty. BI also taking the following measures:-

- To provide sufficient liquidity for the banking industry.

- Consider the implementation of Reserve Requirement Remuneration for all banks.

- To strengthen monetary operations and Islamic financial market deepening.

- Accelerate implementation of the digital economy and finance as part of the national economic recovery efforts.

● Ample room to resume rate cuts to bolster growth, but may await currency and financial market stability

- While we believe BI has ample room to resume its policy rate cut, the central bank may keep key rates steady until Rupiah regains its strength and stabilise to a level before COVID-19 crisis. BI Governor, Perry Warjiyo has clearly stated that the interest rate policy priority would be to maintain Rupiah stability in the short term.

- Nevertheless, the probability of a rate cut at the next Board of Governor Meeting in June is increasing given that Rupiah continues to gain its strength, closing around 14,770 level yesterday against the greenback, highest since 13 March.As of 19 May 2020, the Rupiah strengthened by an average of 5.1% MoM. Mild inflationary pressure and the need to boost growth are factors that are supportive for another rate cut going forward.

- For now, we believe BI would continue to use its policy levers via policy mix and quantitative easing to support growth. So far BI has injected around 503.8 trillion Rupiah into the financial system via bond-buying in the secondary market, providing extra liquidity for repurchase agreement, foreign currency swaps and a reduction in the Rupiah Statutory Reserve Requirement.

Source: Kenanga Research - 20 May 2020