● Bank Indonesia (BI) raised the benchmark 7- day reverse repo rate by 25 basis points (bps) to 5.50% at its twelve and final Board of Governor meeting for this year, its fifth-rate hike in a row, matching house and market expectations

• The Deposit Facility and Lending Facility rates were also raised to 4.75% and 6.25%, respectively.
• BI statement: More measured manner and a follow-up to the front-loaded, pre-emptive, and forward-looking measures to control inflation expectation and to ensure core inflation returns to a target range of 2.0% - 4.0% and to strengthen the rupiah stability amid global financial market uncertainty.

● Domestic growth forecast for 2022 is expected to settle high, while inflation expectations ease

• GDP: BI maintained its upside bias on domestic growth (4.5%-5.3%; 2021: 3.7%) outlook due to continued improvement in domestic demand as well as a strong export performance.
• Inflation: while November’s inflation is still high (5.42%; Oct: 5.71%), above its target range of 2.0% - 4.0%, BI sees inflation expectations easing and lower than earlier forecasts. BI reaffirmed that it would strengthen the monetary policy response to reduce inflation expectations and ensure core inflation returns to its target band. Of reference, core inflation remained relatively high in November (3.30%; Oct: 3.31%).
• Rupiah: depreciated against the USD in December amid the Fed’s hawkishness. As of December 21, the rupiah depreciated by 9.3% against the USD compared to the end of 2021, largely supported by BI stabilisation measures. Nonetheless, other regional currencies also depreciated against the greenback, led by the Philippine Peso (-8.1%), followed by the Malaysian Ringgit (-6.5%) and Thai Baht (-4.6%).

● BI is expected to hike rates further in 1Q23 to tame rising inflation and to support the rupiah

• While the US Fed is expected to embark on a less hawkish path in 2023 amid the rising economic slowdown risk, we expect BI would shift towards a less hawkish tone in the near term. Nevertheless, the policy rate hike going forward would likely aim to combat inflationary pressure, which is expected to remain elevated in the 1Q23.
• Likewise, another rate hike will support the rupiah’s stability, which remains vulnerable to risk sentiment amid fears of global economic slowdown as well as the Fed’s further rate hikes.

Source: Kenanga Research - 23 Dec 2022