● Bank Indonesia (BI) expectedly keptthe benchmark 7-day reverse repo rate steady at 4.00% (KIBB: no change; consensus: no change) at its tenth Board of Governor meeting this year

− TheDeposit Facility rate and Lending Facility rate were also maintained at 3.25% and 4.75%, respectively

● BI statement: The decision was consistent with the need to maintain rupiah stability amid low inflation outlook. It also stressed on quantitative easing (QE) channel through the provision of liquidity that includes support of the government’s state budget. BI also embark on the following measures:-

− Deepening the money market and foreign exchange market via the development of Electronic Trading Platform (ETP) and Central Counterparty (CCP).

− Strengthening policy implementation to boost SMEs through corporatisation, capacity building, access to finance, and digitisation.

− Strengthening the digital economy and financial ecosystem via digital payment instruments, bank collaboration, fintech, and e-commerce.

● BI expects 2020 inflation to miss its target range of 2.0-4.0%

− Attributable to weak domestic demand, adequate supply during the harvesting season, a fairly uninterrupted distribution channel, low international food prices and lower airfares.

● Monetary outlook retained, BI to stand pat on rate decision in the foreseeable future

− Year-to-date (as of 13th October), the rupiah depreciated by 5.9% against the USD. It remained as one of the weakest currencies in the region due to uncertainties stemming from global and domestic factors.

− Given the elevated global financial market uncertainty brought by the COVID-19 jitters, the upcoming US presidential election and Brexit negotiation deadlock, we expect the rupiah to remain pressured in the near term. This may prompt BI to hold rates steady at 4.00% for the rest of the year to support the local note.

− Nonetheless, we believe BI has more room to cut its 7-day reverse repo rate further amid a low interest rate environment and inflation outlook in the advanced economies as well regionally. However, chances of another rate cut are diminishing given that BI sees QE measures are more effective to support the sagging economy.

Source: Kenanga Research - 14 Oct 2020