● Bank Indonesia (BI) kept the benchmark 7-day reverse repo rate at 5.75% at its third Board of Governor meeting for this year, matching house and consensus expectations.

- 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 continued decline in inflation expectations and future inflation. BI believe the policy rate of 5.75% is sufficient to bring the core inflation within the target range of 2.0% - 4.0% in 1H23, while headline inflation returned to the similar target range in 2H23.

● Upgrade global growth forecast amid

optimism of China’s reopening

- GDP: BI upgraded its projection for 2023 global economic growth to 2.6% from the

previous 2.3%, matching its original forecast underpinned by the positive impact of China’s reopening and easing global supply chain disruptions. This is also backed by better-than-expected growth in the US and EU amid a lower risk of recession. Meanwhile, on the domestic front, BI maintained its growth forecast at 4.5% - 5.3%, with an upside bias driven by higher domestic demand and exports.

- Inflation: BI maintained its projection on inflation, with core and headline inflation returning to the target range of 2.0% - 4.0% in 1H23 and 2H23, respectively. February’s inflation was slightly higher at 5.47% than previously (Jan: 5.28%), suggesting that the impact of the previous cumulative rate hikes has yet to fully materialised.

- Rupiah: As of March 15, the Rupiah strengthened by 1.2% against the USD compared to the end of 2022. Other regional currencies also gained, namely the Philippine Peso (1.5%) and the Chinese Yuan (0.4%). However, the Thai Baht (-0.1%) and the Ringgit (-1.7%) weakened against the greenback.

● Policy rate may stay at 5.75% for quite some time, contingent on rupiah’s stability

- We believe BI has completed its rate-tightening cycle and will likely shift towards a neutral stance going forward. This is also backed by the prospect of a slower rate hike by the US Fed amid the recent global banking fears and the impending global economic slowdown. In addition, easing inflationary pressure and a steady Rupiah will provide room for BI to hold rates steady at the current level and support the economic growth outlook.

- USDIDR year-end forecast (14,912; 2022: 15,573): Though the Rupiah was pressured by the recent hawkish US Fed and global bank fears, we still expect the Rupiah to strengthen towards the end of the year. This is in anticipation that the US Fed may pivot toward a less hawkish stance and probably turn dovish as soon as in the 2H23 due to growth concerns.

Source: Kenanga Research - 17 Mar 2023