● In line with house and market expectation, Bank Indonesia (BI) yesterday slashedthe benchmark7-dayreverserepo rate by 25 basis points (bps) to 4.00%

- The Deposit Facility rate and Lending Facility rate were also reduced to 3.25% and 4.75%, respectively.

- This brings a total of 100 bps rate cut this year to cushion the COVID-19 economic fallout,and shore up growth.

- It also matched the 100 bps cut in 2019 and firmly suggests that the priority now is to support economic growth rather than rupiah's stability.

● BI statement: The decision was consistent with low projected inflation, maintained external stability, and supporting the national economic recovery during the COVID-19 pandemic. BI also reaffirmedand introduced the following measures:-

- To maintain the rupiah exchange rate stabilisation policy.

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

- Provide funding for the Deposit Insurance Corporation (LPS).

- Speed up payment system digitalisation as part of the economic recovery efforts.

● More room for another rate cut, as priority shift to supporting growth amid poor economic growth trajectory

- BI in June's statement revised down its 2020 GDP growth projection to a range of 0.9% to 1.9% from 2.3%, versus the government’s forecast of -0.4% to 1.0% on the impact of large-scale social restrictions introduced in the 2Q20.

- Going forward, BI expects the pace of domestic economic recovery to accelerate in the near term driven by the absorption of fiscal stimuli, successful loan and corporate restructuring, the digitalisation of economic activities, as well as the implementation of health protocols in the new normal.

- Nonetheless, we expect BI to continue its monetary easing cycle at the next Board of Governor meeting in August, with another 25 bps cut to 3.75%, given that the current priority is seen to be leaning towards supporting growth recovery. Though the latest leading indicators such as retail sales, manufacturing PMI and trade data points towards a gradual build up of growth momentum, the downside risks persist on concerns over the surging COVID-19 cases, which would hamper consumer confidence and limit its growth recovery

Source: Kenanga Research - 17 Jul 2020