● Bank Indonesia (BI) keptthe benchmark 7-day reverse repo rate unchanged at 3.75% (KIBB: 50% probability rate cut; consensus: no change) at its final Board of Governor meeting this year

− The Deposit Facility rate and Lending Facility rate were also maintained at 3.00% and 4.50%, respectively.

● BI statement: The decision was consistent withthelow inflation outlook, maintained external stability, and efforts to support economic recovery. It also implemented the following measures:-

− Accommodative macroprudential policy for priority sectors.

− Promoting lower lending rates with the Indonesian Financial Services Authority in terms of interest rate transparency

− Accelerating digital transformation through payment system policy. BI also extending the 0% Merchant Discount Rate on QRIC transactions for micro-enterprises until 31st March 2021.

● BI expects the rupiah to appreciate as the currency is fundamentally undervalued

− Mainly due to narrow current account deficit, low and stable inflation, attractive domestic financial assets, lower risk premium, and potential high portfolio inflows due to the lush global liquidity.

− As of 17th December, the rupiah has gained marginally by 0.1% to 14,108 compared to the end of November. Year-to-date, it depreciated by 1.5% compared with the level at the end of 2019.

● Ample space for further monetary easing to boost economic recovery

− While BI seems upbeat on domestic growth in 2021, we remain cautious about the pace of economic recovery. This is mainly due to the benign inflation, which remains below its target range, as reflected in November’s reading (1.59%).Besides, we believe that BI has more room to cut its policy rates to bolster economic recovery

− The rupiah, which is a key variable for its interest rate decision, has performed well against the USD in recent weeks, supported by the COVID-19 vaccine optimism. Nonetheless, a sustained rally of the rupiah may support further monetary easing in early 2021.

Source: Kenanga Research - 18 Dec 2020