● Bank Indonesia (BI)kept the benchmark7-dayreverserepo ratesteady at 4.00% (KIBB: 50% probability of25 bps cut; consensus: no change) at its eight Board of Governor meeting this year

- The Deposit Facility rate and Lending Facility rate were also maintained at 3.25% and 4.75%, respectively.

● BI statement: The decision was consistent withthe need to maintain external stability amid low inflation outlook, while focusing on quantitative easing channel to boost the economic recovery. BI also reaffirmed and introduced the following measures:-

- To maintain the rupiah exchange rate stabilisation policy.

- Strengthening the monetary operations strategy to accelerate monetary policy transmission.

- Reduce the minimum limit of downpayment on green automotive loans/financing from 5-10% to 0%.

- Strengthening synergy with various agencies to accelerate digitalisation.

● BI to hold rates steady till year end in a bid to maintain external stability amid global financial market uncertainty

- While we believe BI has ample space to reduce its benchmark policy rate further, the possibility of another rate cut is diminishing, given the optimistic outlook signalled by BI on growth recovery. This is supported by several leading economic indicators, which point to a domestic and global economic recovery, namely the public mobility, retail sales, consumer and business confidence as well as manufacturing PMI.

- In addition, we believe that BI seems to balance the risk of supporting growth with rupiah’s stability amid increasing global financial market uncertainty due to escalating geopolitical tensions between the US and China and partly due to concerns over a new wave of COVID-19 infections. BI also believes that the liquidity injection channel would be more effective in supporting the economic recovery rather than the interest rate channel in the current pandemic crisis.

- Nevertheless, the current low-interest rates as a result of a total 100 bps cut this year, and its priority shifting towards quantitive easing program along with sizeable government fiscal stimulus is expected to boost the economic recovery momentum. Therefore, we expect BI to keep its 7-day reverse repo rate at 4.00% for the rest of the year

Source: Kenanga Research - 21 Aug 2020