● Bank Indonesia (BI) kept the benchmark 7-day reverse repo rate at 5.75% at its second Board of Governor meeting for this year, matching consensus but against house expectation

- The Deposit Facility and Lending Facility rates were also kept at 5.00% and 6.50%, respectively.

- BI statement: consistent with the preemptive and forward-looking stance to ensure a decline in inflation expectation and future inflation with the headline and core inflation to return to a target range of 2.0% - 4.0%. The rupiah exchange rate stabilisation policy was strengthened through the implementation of export proceeds measures and in line with market mechanisms.

● Upbeat on global and domestic economic growth amid China's economic reopening

- GDP: Though BI previously slashed its projection for global economic growth in 2023 to 2.3% from 2.6%, it remained optimistic that global growth may reach higher than the previous projection due to the positive effect of China's reopening. Nonetheless, it remains cautious about growth in the US and Europe. Meanwhile, on the domestic front, BI turned upbeat with a growth forecast for 2023 to be on the upside bias in the range of 4.5%-5.3%, following the 5.31% growth recorded in 2022. Growth drivers are expected to be contributed by export performance, household consumption, and investment.

- Inflation: BI sees both core and headline inflation to return to the target range of 2.0% - 4.0% in 1H23 and 2H23, respectively. Of note, January's inflation was recorded at 5.28% (Dec 22: 5.51%), which signals a cooling inflationary trend going forward as a result of the previous rate hikes.

- Rupiah: As of February 15, the rupiah strengthened by 2.4% against the USD compared to the end of 2022. Similarly, other regional currencies also appreciated against the greenback, such as the Philippine Peso (1.0%), Thai Baht (0.7%) and Malaysian Ringgit (0.3%). Nevertheless, the rupiah was pressured in recent weeks following an expectation of further rate hikes by the US Fed.

● BI may have reached the end of its hiking cycle

- We reckon BI has completed its rate-tightening cycle following the pause decision today and will likely shift towards a neutral stance going forward. This also takes into account the prospect of a slower rate hike by the US Fed and the impending global economic slowdown. Besides, inflationary pressure is expected to ease, giving room for BI to stay at the current level and supporting the economic growth outlook.

- USDIDR year-end forecast (14,912; 2022: 15,573): as the US Fed may raise interest rates further and retain it longer than expected, we expect the rupiah to face downward pressure in the near term. Nonetheless, we expect the local note to regain momentum towards the end of the year as the US Fed may signal a slowdown in the interest rate hike and probably turn dovish due to growth concerns.

Source: Kenanga Research - 17 Feb 2023