● Bank Indonesia (BI) kept the benchmark 7-day reverse repo rate unchanged at 5.75% at its sixth Board of Governor meeting for this year, in line with expectations

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

- BI statement: maintains its view that inflation expectations are “well-anchored” and expects headline inflation to return to its target range of 2.0% – 4.0% by year end.

● Growth forecast remains unchanged but sees inflation moderating faster than expected

- GDP: BI maintained its 2023 global economic growth forecast at 2.7% despite rising uncertainty but flagged “risk of moderating growth and monetary policy rate hikes in advanced economies” mainly associated with economic development in the US and China. However, it sees growth in other developing economies, such as India, to remain solid, driven by domestic demand and service exports. On the domestic front, BI retained its economic growth forecast at 4.5% - 5.3% as it expects growth to remain solid backed by domestic demand and positive export performance. This is reflected in several leading indicators such as growing consumer confidence and positive retail sales, expansionary in Manufacturing PMI, increased investment and improved tourism sector.

- Inflation: BI sees inflation moderating towards the target range of 2.0% - 4.0% quicker than previously projected in line with the monetary policy consistency and synergy between government agencies to control inflation. That said, BI is confident that inflation will remain under control in the target range for the rest of the year.

- Rupiah: it remains the strongest currency in Asia-year-to-date. As of June 22, rupiah stayed relatively higher against the greenback compared to the end of last year, up by 4.1% while other regional currencies weakened, led by the Ringgit (-5.7%) and followed by the Yuan (-4.0%) and Baht (-1.4%).

● Outlook unchanged, BI is likely to keep its policy rate steady at 5.75% for the rest of the year

- As inflation is expected to moderate further, returning within the BI target range of 2.0% - 4.0%, we believe this would be one of the factors for BI to keep the policy rate unchanged at 5.75% for the rest of the year. Nonetheless, we expect BI to gradually ease its monetary policy in 2024 backed by a steadier Rupiah and on the expectation that inflation would remain under control.

- USDIDR year-end forecast (14,730; 2022: 15,573): No change to our year-end forecast as we expect the Rupiah to strengthen compared to a depreciation the year before. The strengthening of the Rupiah would mainly be backed by its improving domestic economic fundamentals along with the spillover impact from China’s economic reopening optimism as well as potentially dovish stance by the US Fed in the 2H23.

Source: Kenanga Research - 23 Jun 2023