● Bank Indonesia (BI) kept the benchmark 7-day reverse repo rate at 3.50% for the twelfth consecutive time at its Board of Governor meeting. The decision, on February 10, 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 the stability of an exchange rate, inflation and effort to support economic growth amid increasing external pressures.

- Rupiah Statutory Reserves (RRR): BI confirmed to increase the RRR (currently at 3.5% for both Conventional and Islamic banks) with the tightening cycle to be gradual. For the conventional bank, RRR will be gradually increased to 5.0% from March 1. It will then increase to 6.0% in June and 6.5% in September. RRR will be raised to 4.0% in March and further increase to 4.5% in June and 5.0% in September for the Islamic bank.

● Growth recovery to continue in 2022 with cautious outlook due to potential Omicron wave

- GDP: BI sees momentum in the recovery process to continue in 2022 following 4Q21 GDP growth that expanded to 5.02% (3Q21: 3.51%) on broad-based improvement across components. This is also reflected in the latest leading macroeconomic indicators pointing to a sustained recovery. Nonetheless, it remains cautious following the spread of the Omicron variant. Overall, the growth forecast for 2022 was retained at 4.7%-5.5% (2021: 3.69%).

- Inflation: BI stated that inflation remains low and supports economic stability. Moreover, it is aware that inflation in the volatile foods category increased driven by restrained supply amid the ongoing planting period and the rise in CPO prices on the global market. Although January’s inflation rate of 2.18% is higher than the previous month (1.87%), it is still within BI's target range of 2.0%-4.0%.

- Rupiah: Its performance was relatively stable despite increasing uncertainty in global financial markets brought by the hawkish US Fed and the spread of the Omicron variant. The rupiah was supported by continued foreign capital inflows and the supply of domestic foreign currency, as well as positive sentiment over the outlook for the domestic economy. As of February 9, the rupiah depreciated by 0.7% against the USD sine the beginning of the year. Similarly, regional currencies, including the Malaysian Ringgit (-0.4%) and Philippine Peso (-0.7%), weakened against the greenback except for the Thai Baht (+1.4%).

● Rate hike expected in 4Q22 despite rising external pressure

- While the decision to increase RRR is confirmed and will be gradual, we believe it also suggests that rate hikes may come later though slightly behind the US Fed tightening cycle. Hence, we reiterate our view of two rate hikes in the 4Q22 as economic recovery is expected to gather momentum and inflationary pressure builds up. Nonetheless, given that inflation is expected to be within BI target range and the need to continue supporting growth recovery, we believe that policy rates would remain low for now.

Source: Kenanga Research - 11 Feb 2022