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

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

- BI statement: consistent with the monetary policy stance to ensure that inflation remains low and controlled within the target range of 2.0% - 4.0% in 2023 and 1.5% - 3.5% in 2024. BI also reiterated that the policy remained focused on controlling the stability of the rupiah as a measure to anticipate the impact of global financial uncertainty.

● GDP growth and inflation outlook remained unchanged

- GDP: BI maintained the 2023 global economic growth forecast at 2.7% amid higher global economic uncertainty, citing the slowing Chinese and resilient US economies. On the domestic front, BI kept its economic growth forecast unchanged at 4.5% - 5.3% largely supported by domestic demand in line with positive consumer sentiment. Nevertheless, BI still expects slower exports due to weakening global demand and falling commodity prices.

- Inflation: No change to its inflation outlook, as BI believes inflation will remain under control in the range of 2.0% - 4.0% in the remainder of 2023 and 1.5% - 3.5% in 2024. Of note, August’s inflation increased slightly to 3.27% (Jul: 3.08%) but remained within BI’s target range.

- Rupiah: Despite a stronger dollar, the rupiah remains the strongest currency in Asia year-to-date compared to last year. As of September 20, the rupiah is still relatively higher (+1.5%) than the greenback. Nevertheless, most Asian currencies depreciated, with the steepest decline led by ringgit (-6.4%), followed by baht (-4.0%) and peso (-1.7%).

● Policy rate is expected to remain at 5.75% for the rest of 2023 and possibly until 1Q24

- Given the fragile rupiah amid expectation that the US Fed will hold interest rates higher and longer, as well as the fears of global economic slowdown as evidenced by weak China’s post-pandemic recovery, we expect BI to maintain its policy rate steady at 5.75% for the rest of the year. This is to continue supporting the local note, which continues to be pressured by a stronger USD and is consistent with the BI monetary policy stance. Nevertheless, we believe BI has room to lean towards a rate cut in 2024 to support its growth trajectory, given that the inflation rate is expected to continue to moderate and remain under its target range, while the rupiah is anticipated to reverse its depreciation.

- USDIDR year-end forecast (14,730; 2022: 15,573): Forecast is maintained as we believe the rupiah could gain its strength if the US Fed signal a potential dovish shift towards the year-end. Likewise, we expect the rupiah to remain pressured in the near term as it remains susceptible to external factors.

Source: Kenanga Research - 22 Sept 2023