• In a surprise move, Bank Indonesia (BI) hiked its benchmark 7-day reverse repo rate by 25 bps to 6.00% at its tenth Board of Governor meeting for this year
  
  − The Deposit Facility and Lending Facility rates were also raised to 5.25% and 6.75%, respectively.
  
  − BI statement: to strengthen the stability of the rupiah from the impact of global uncertainty, and as a pre-emptive and forward-looking measure to mitigate the impact on imported inflation so that inflation remains under control within the target range of 2.0% - 4.0% in 2023 and 1.5% - 3.5% in 2024.

• Sees moderate global GDP growth in 2024 and flagged a cautious tone on domestic inflation
  
  − GDP: Despite its concern about the global outlook, BI revised up its 2023 global economic growth forecast to 2.9% from 2.7% as it expects the US economy to be on a strong footing. However, the central bank is now pencilling a slight moderation of 2.8% growth in 2024. On the domestic front, BI maintain its economic growth forecast unchanged at 4.5% - 5.3% and expects growth to expand in 2024, supported by domestic demand. However, it did not state a growth target for 2024 yet.
  
  − Inflation: No change to its inflation outlook, remained in the range of 2.0% - 4.0% for 2023 and 1.5% - 3.5% in 2024. Nevertheless, BI stated that it continues to monitor any upside risks to inflation, including rising global energy and food prices and the impact of the rupiah's depreciation on imported inflation.
  
  − Rupiah: As of October 18, the rupiah depreciated by 1.5% against the greenback, which could have been a justification for the rate hike. Nevertheless, most Asian currencies also depreciated against the dollar, with the steepest decline led by ringgit (-7.7%), followed by baht (-5.2%) and peso (-2.1%).

• Near-term policy rate direction susceptible to the rupiah's stability
  
  − BI could raise its policy rate further if the local note continues to slide, as reflected by a surprise hike yesterday, which aims to support the rupiah. However, the possibility of another rate hike is limited given the growth slowdown concern amid a higher interest rate environment and the expectation that the dollar may lose its strength once the US Fed hinted at a policy shift. Expectation of inflation to remain low could be another factor.
  
  − USDIDR year-end forecast (14,730; 2022: 15,573): Despite recent pressures on the rupiah amid a strong greenback, partly due to rising geopolitical tensions brought by the escalation in the Israel-Palestine conflict and ongoing Russia-Ukraine war, we still expect the local note to reverse its loses. This is likely because we anticipate the rupiah will gain strength once the US Fed signals a shift in its monetary policy stance. Likewise, we expect the rupiah to remain pressured in the near term as it remains susceptible to external factors.

Source: Kenanga Research - 20 Oct 2023