● Bank Indonesia (BI) kept the benchmark 7-day reverse repo rate unchanged at 3.50% for the tenth consecutive time, out of its twelve and final Board of Governor meetings for this year. The decision, on December 16, was in line with house and market expectation

- The Deposit Facility and Lending Facility rates were also kept at 2.75% and 4.25%, respectively.

- BI statement: The decision is in line with the need to maintain exchange rate and financial system stability amid a low inflation outlook and the effort to support economic growth.

● Higher growth projection in 2022 amid low inflation outlook

- GDP: BI expects domestic growth to continue to improve in 2022, in line with the increased mobility following low COVID-19 cases. Growth forecasts range for 2021 was cut earlier in November to 3.2%- 4.0% from 3.5%-4.3%, and relatively upbeat on 2022 growth at 4.7%-5.5%. In addition, BI retained its 2021 global growth forecast at 5.7% and to moderate to 4.4% in 2022, supported by higher trade volume and commodity prices.

- Inflation: Inflation seems not a concern for BI. It sees the inflation rate to remain relatively stable amid growing domestic demand, coupled with a controlled supply of goods, a stable exchange rate and weak inflation expectations. BI retained its inflation forecast at a target range of 2.0%-4.0% in 2021 and 2022.

- Rupiah: BI sees global financial market uncertainty to persist, following Fed’s signal of an aggressive monetary policy tightening cycle and the emergence of the Omicron variant, which could result in low capital flows, subsequently pressuring the rupiah. As of December 16, the rupiah depreciated by 2.2% against the USD compared to the end of 2020 level. This is still relatively lower compared to other regional peers such as Malaysian Ringgit (-4.7%), Philippine Peso (-4.1%), and Thailand Baht (-11.7%).

● Monetary policy outlook to remain status quo for the most of 2022

- We retained our monetary policy outlook that BI would likely keep rates steady in most part of next year, with policy tightening likely towards the end of 2022. Lower inflation outlook, which is expected to rise within BI’s target range and the need to continue supporting growth recovery amid the uncertainty of COVID-19 new variants, would ensure policy rates to stay low for quite some time.

Source: Kenanga Research - 17 Dec 2021