● Bank Indonesia (BI) left the benchmark 7-day reverse repo rate at 3.50% for the 14th straight month at its fourth Board of Governor meeting for this year. The decision, on April 19, 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 stability, manage inflation, and continue to support economic growth amid increasing external pressures brought by the Russia-Ukraine crisis and the acceleration of monetary policy tightening among developed economies.

● 2022 growth projection downgraded amid elevated external pressures

- GDP: BI sees the increasing geopolitical risks of the Russia-Ukraine crisis and uncertainty in global financial markets driven by the US Fed tightening cycle to undermine global economic recovery. BI revised its global economic growth forecast in 2022 to 3.5% from 4.4% previously, with the global economic slowdown expected to impact domestic demand through restrained export volumes and rising energy and food prices. Consequently, BI revised its domestic growth forecast for 2022 slightly lower to 4.5%-5.3% from 4.7%-5.5% (2021: 3.69%) previously.

- Inflation: BI maintained its inflation target range of 2.0%-4.0% despite recent higher inflation. Overall, inflation is expected to remain manageable and supportive of economic stability, backed by maintained exchange rate stability and the consistency of BI's policies on managing inflation expectations. Nonetheless, BI is cautious about the impact of elevated global energy and food prices.

- Rupiah: The local note performance was relatively stable despite increasing uncertainty in global financial markets, primarily supported by continued foreign capital inflows, supply of foreign currency and positive sentiment over the domestic economic outlook. As of April 19, the rupiah depreciated by 0.5% against the USD compared to the end of 2021. This is relatively lower compared to other depreciating regional currencies, including the Thai Baht (-1.6%), Malaysian Ringgit (-2.1%) and Philippine Peso (-2.9%).

● BI may hike its policy interest rate in 2H22 on the expectation of gradual economic recovery

- Given its latest downward revision to the growth outlook amid heightened external uncertainty, we believe BI's monetary policy stance would focus on boosting growth in the near term rather than pivoting towards a policy tightening. Rate hikes may be delayed and behind the hawkish US Fed tightening cycle. For now, we still expect BI to do at least two rate hikes of up to 50 bps in the 2H22 as the economic growth gathers momentum backed by demand-driven inflationary pressure.

Source: Kenanga Research - 20 Apr 2022