● Bank Indonesia (BI)keptthe benchmark7-dayreverserepo rate unchanged at 3.50% at its 4th Board of Governor meeting this year onApr 20. The decision was in line with house and market expectation

- The Deposit Facility rate and Lending Facility rate were also retained at 2.75% and 4.25%, respectively.

● BI statement: The decision is in line with the need to maintain the stability of the rupiah against the impact of global financial markets uncertainty along with a low inflation outlook. BI also pledged to:

- Optimise accommodative monetary and macroprudential policy as well as accelerate the digitisation of the payment system.

● Slashed domestic growth outlook amid weak demand

- GDP: BI slashed growth forecast to 4.1-5.1% from 4.3-5.3% (2020: -2.07%) previously due to weakerthan-expected domestic recovery as reflected in the latest consumer expectations and retail sales data despite progress made on vaccination campaign. Nonetheless, BI revised its global economic growthforecastto 5.7% from 5.1%,underpinned by the faster improvement of the US and China economies on the back of vaccination progress, additional fiscal stimulus and improving domestic spending.

- Inflation: BI maintained its inflation forecast within the 2.0-4.0% target band due to weak demand and adequate supply.

● BI expected to stand pat on policy rate amid fragile rupiah

- The value of rupiah has been influenced by the ongoing global financial market uncertainty brought by the rising US Treasury yields on fears about rising inflation in the US. Year-to-date, the rupiah depreciated by 3.4% against the greenback compared to the level at the end of 2020. The local note is expected to remain under pressure in the near term amid the reflation trade theme attributable to the faster progress of US economic recovery along with its massive stimulus.

- While we believe BI has ample room to resume its monetary easing to bolster growth, we maintain our outlook that BI would likely hold rates steady for the rest of the year.

Source: Kenanga Research - 21 Apr 2021