● Bank Indonesia (BI)keptthe benchmark7-dayreverserepo rate unchanged at 3.50% at its 5th Board of Governor meeting this yearon May 25. 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 expected low inflation and to maintain the stability of the rupiah while boosting economic recovery. BI also embark on the following policy measures:

- Optimise accommodative monetary and macroprudential policy as well as accelerate the digitisation of the payment system. This includes lowering the upper limit on credit card interest rates from 2.0% to 1.75% per month effective from July 1.

● Domestic growth points to further improvement

- GDP: BI hint towards improving 2Q21 domestic economic growth underpinned by various leading indicators such as higher consumer expectations, retail sales, manufacturing PMI, export-import realisation, and non-building investment. Hence, BI expect the GDP growth for 2021 to be in line with its projection of 4.1-5.1% (2020: -2.07%).

- Inflation: BI maintained its inflation forecast within the 2.0-4.0% target band due to weak demand and adequate supply despite a seasonal spike in demand during Ramadhan.

- Rupiah:As of May 25, the rupiah strengthened 1.6% compared to the average April 2021 level but remained weak compared to end 2020 level due to UST yield fluctuations.

● No change in policy rate expected until 2022

- We continue to expect BI to maintain its policy rates unchanged for the rest of the year. This is mainly due to potential rising UST yields on the back of rising inflation in the US, bolstered by its progress of economic recovery which would likely put pressure on the rupiah.

- Nonetheless, we still believe BI has ample room to resume its monetary easing amid the lower inflation rate outlook and the need to boost economic recovery. However, the probability for another rate cut is low, given the weak rupiah.

Source: Kenanga Research - 27 May 2021