● Bank Indonesia (BI) kept the benchmark 7-day reverse repo rate at 5.75% at its fourth Board of Governor meeting for this year, in line with 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 current policy rate is sufficient to steer core inflation under control within the target range of 2.0% - 4.0% in 2023, while headline inflation returned to a similar target range earlier than previously projected.

● BI maintains global growth forecast due to the positive effect of China’s reopening

- GDP: BI maintained its 2023 global economic growth forecast at 2.6%, backed by the positive impact of China’s reopening, improvement in the US economy, and easing global financial uncertainty following the responses from the Fed and ECB in mitigating the risk of the banking crisis. Likewise, BI continues to expect strong domestic growth, mainly supported by rising domestic demand, with private consumption to strengthen further with increased mobility, consumer confidence and reduced inflation.

- Inflation: BI maintained its projection on inflation but expects headline inflation to return to the target range of 2.0% - 4.0% earlier than previously estimated. Similarly, BI expect core inflation to remain in the target range of 2.0% - 4.0% for the rest of the year. Of note, headline inflation moderated to 4.97% in March (Feb: 5.47%), the lowest in seven months.

- Rupiah: As of April 17, the Rupiah was the best performer. It strengthened by 5.0% against the USD compared to the end of 2022. Other regional currencies also gained, namely the Thai Baht (0.5%) and Philippine Peso (0.3%). However, the Ringgit (-0.4%) remained relatively weak against the greenback.

● Policy rate expected to stay at 5.75% for the rest of the year

- We expect the policy rate to remain unchanged for the rest of the year, given the projected moderation in inflationary trend in the coming months, which is expected to return within the BI target range of 2.0% - 4.0%. This is also partly due to weaker commodity prices amid the global economic slowdown and as the economy returns to normalcy. Meanwhile, a steady Rupiah will allow BI to hold rates steady at the current level.

- USDIDR year-end forecast (14,912; 2022: 15,573): The Rupiah may reverse its gain if the US Fed continue to tighten its monetary policy in May, coupled with rising fears of a global economic slowdown. Nonetheless, the local note is expected to be supported by the impact of China’s economic reopening and a potential dovish stance by the US Fed. With that said, we retain our year-end target for now.

Source: Kenanga Research - 19 Apr 2023