● Bank Indonesia (BI) kept the benchmark 7-day reverse repo rate at 3.50% for the 17th straight month at its seventh Board of Governor meeting this year. The decision, on July 21, was in line with market expectation, but the house called for a 25bps rate hike

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

- BI statement: The decision is consistent with the core inflation forecast that remains under control amid the risk of the impact of the global economic slowdown on the domestic growth outlook.

● Less sanguine on growth outlook amid heightened external risks

- GDP: BI slashed down the global growth forecast to 2.9% from the previous projection of 3.5%. This is the second revision for this year, mainly due to the rising risk of stagflation and uncertainty in global financial markets. While the central bank maintained its domestic growth projection at 4.5%-5.3% (2021: 3.7%), BI sees growth to settle at its lower end of the forecast range amid a rising inflationary threat that could restrain private consumption, while the global economic slowdown may impede export performance.

- Inflation: Inflationary pressure is expected to increase due to rising global energy and food prices amid supplyside pressures. BI now sees headline inflation for 2022 to hit its upper limit of the target band before returning to within the 2.0%-4.0% range in 2023.

- Rupiah: Regional currencies, including the Rupiah, relatively weakened against the USD in July due to more aggressive global monetary policy tightening to combat rising inflation. As of July 20, the Rupiah depreciated by 5.1% against the USD compared to the end of 2021. This is relatively lower compared to other regional currencies such as the Malaysian Ringgit (-6.8%), Thai Baht (-10.4%) and Philippine Peso (-10.4%).

● Two rate hikes are expected in 2H22, with the first in late 3Q22

- As BI skipped policy rate tightening in July’s Board of Governor meeting, we expect monetary policy normalisation to begin in September and will likely be at a gradual pace. That said, we expect the monetary policy stance in the near term to remain supportive of economic growth, especially with a dovish statement by BI amid manageable inflationary pressure and a slower global growth outlook.

- Nevertheless, we see further downside risk on the Rupiah amid US Fed hawkishness. However, Rupiah may remain supported by a solid export performance backed by elevated commodity prices. For now, it remains clear that BI is leaning on supporting post-pandemic recovery rather than rupiah stability.

Source: Kenanga Research - 22 Jul 2022