● As expected, Bank Indonesia (BI) yesterdayslashedthe benchmark 7-day repo rate by 25 basis points (bps) to 4.25% in line with house and market expectation

- The Deposit Facility rate and Lending Facility rate were also reduced to 3.50% and 5.00%, respectively.

- This brings a total of 75 bps rate cut this year to cushion the negative impact of COVID-19 pandemic on its economy.

● BI statement: The decision was consistent with efforts to maintain economic stability and supporting national economic recovery amid COVID-19. It also sees room for lower interest rates in line with low inflationary pressure, maintained external stability, and the need to boost growth. BI also taking the following measures:-

- To continue with policy stabilising the rupiah exchange rate and quantitative easing.

- To implement reserve requirement remuneration for banks.

- To strengthen the policy mix in order to maintain macroeconomic stability and the financial system.

- Funding the State Revenue and Expenditure Budget through the purchase of government bonds in the primary market.

- Provide liquidity in the banking industry to boost the loan restructuring program.

● Ample room for further easing to aid economic recovery plan amid grim growth outlook

- BI revised down its 2020 economic growth projection to a range of 0.9% to 1.9% from 2.3%, its third revision for this year. The lower growth is expected to be weighed by a decline in the 2Q20 growth on the impact of the large-scale social restrictions. It sees growth to recover in the 3Q20 following the relaxation of the large-scale social restrictions in the middle of June and supported by the policy stimuli.

- Meanwhile, the government projects GDP growth to contract by 3.1% in 2Q20, its worst quarterly growth since the 1998 Asian Financial Crisis. However, the government maintained its full-year forecast at 2.3% and set -0.4% as a worst-case outcome.

- Given the dovish stance signalled by the BI's governor as well as the grim growth outlook, we expect BI to embark onfurther monetary easing by at least another 25 bps cut to 4.00% in a bid to support economic recovery. Nevertheless, the next rate decision would still depend on the rupiah's stability as downside risk persists on concerns over a second wave of COVID-19 infections. As of 18 June, the rupiah gained 3.6% to 14,078 from the end of May level

Source: Kenanga Research - 19 Jun 2020