● Bank Indonesia (BI) unexpectedly slashed the benchmark 7-day reverse repo rate by 25 basis points (bps) to 3.75% (KIBB: 50% probability rate cut; consensus: no change) atits eleventhBoard of Governor meeting this year

− The Deposit Facility rate and Lending Facility rate were also reduced to 3.00% and 4.50%, respectively.

− The central bank has cut its benchmark policy rate for the fifth time this year or a total of 125 bps to a record low to support the economy impacted by the COVID-19 fallout.

● BI statement: The decision was based on the low inflation outlook and to expedite the economic recovery. BI is also committed to providingliquidity for the state budget realisation. It also implemented the following measures:-

− Supporting the economic recovery through payment system policies by extending the period of lower service fees, lower payment limit and late payment fees for credit cards and reducing service fees for the BI’s Real Time Gross Settlement system.

● BI sees the rupiah as undervalued and has the potential to appreciate further

− Underpinned by lower current account deficit, low inflation, high attractiveness of domestic financial assets, lower risk premium and abundant of liquidity.

− Year-to-date (as of 19th November), the rupiah depreciated by 1.8% to 14,155 against the USD. Nonetheless, the rupiah has gained steadily following US election results and COVID-19 vaccine optimism.

● BI expects the 2020 inflation rate to be lower than its target range of 2.0-4.0% before returning in 2021

− Mainly due to weak demand, lower electricity tariffs and continued reductions in airfares. However, inflation remained supported by the increase in horticultural prices in the wake of the harvesting season.

● Chances of another 25 bps rate cut in December is 50/50

− We assign a 50% probability of 25 bps rate cut in December, given the relatively less sanguine outlook on the economy and low inflation rate. We believe that BI still has room to cut its policy rate going into 2021 to boost economic recovery. Nevertheless, the chances of another rate cut will depend on the rupiah’s stability.

Source: Kenanga Research - 20 Nov 2020