● Bank Indonesia (BI) left the benchmark 7-day reverse repo rate at 3.50% for the 15th straight month at its fifth Board of Governor meeting for this year. The decision, on May 24, 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, control inflation, and to support economic growth amid increasing external pressures brought by the Russia-Ukraine crisis and the acceleration of monetary policy tightening among developed and developing economies.
- Rupiah Statutory Reserves (RRR): BI accelerates the normalisation of liquidity policy. For conventional commercial banks, RRR will increase to 7.5% from July 1 and further rise to 9.0% (previously 6.5%) from September 1. Meanwhile, for Islamic Commercial Banks, BI will increase RRR to 6.0% from July 1 and further raise to 7.5% (previously 5.0%) from September 1.
● 2022 domestic growth to be supported by strong domestic demand and exports
- GDP: BI sees the ongoing Russia-Ukraine crisis, China's zero-Covid policy, and acceleration of monetary policy tightening in various countries to weigh on global growth. Nonetheless, BI maintained domestic growth projection at 4.5%-5.3% (2021: 3.69%) due to further improvement supported by strong domestic demand and exports.
- Inflation: Inflation target range maintained at 2.0%-4.0% despite higher inflation in April (3.27%; Mar: 2.64%). BI expects inflationary pressure to continue in tandem with elevated global commodity prices. We concur with the BI outlook due to various policy support to control inflation, such as price control on cooking oil and an additional budget of USD24.0b approved for energy subsidies.
- Rupiah: Following hawkish US Fed and risk-off sentiment due to concern of global economic slowdown, the Rupiah, alongside other regional currencies, depreciated against the USD. Nonetheless, the depreciation was partially mitigated by Indonesia's strong economic recovery outlook and partly due to a lower current account deficit amid robust exports and elevated commodity prices. As of May 24, the Rupiah depreciated by 2.8% against the USD compared to the end of 2021. This is relatively lower compared to the Malaysian Ringgit (-5.5%).
● Rate hike expected in 2H22 with up to 50 bps
- Given its latest dovish tone amid heightened external uncertainty, we believe BI's monetary policy stance would focus on growth recovery in the near term. However, we also believe any acceleration in monetary policy tightening in the near term would be subject to the stability of the Rupiah, which could be pressured by the hawkish US Fed.
Source: Kenanga Research - 25 May 2022
Created by kiasutrader | Mar 25, 2024