• Bank Indonesia (BI) maintained its benchmark 7-day reverse repo rate at 6.00% at its eleventh Board of Governor meeting for the year, in line with expectations

− The Deposit Facility and Lending Facility rates were also maintained at 5.25% and 6.75%, respectively.

− BI statement: the decision is consistent with the policy of stabilising the rupiah exchange rate from the impact of global uncertainty and as a pre-emptive step to mitigate the impact on imported inflation so that it remains under control within the target range of 2.0% - 4.0% in 2023 and 1.5% - 3.5% in 2024.

• Domestic demand continues to propel domestic growth, providing robust support for the rupiah

− GDP: BI maintained its 2023 global economic growth forecast at 2.9% but expects a slight moderation to 2.8% in 2024. BI anticipates positive domestic growth in 4Q23, supported by leading indicators such as consumer confidence, income expectations, and the Manufacturing PMI. The 2023 growth target remains at 4.5% - 5.3% (2022: 5.3%) and expected to increase next year due to spending in the General Election, development of the national strategic projects (PSN) and growing consumer confidence.

− Inflation: Inflation target for 2023 (2.0% - 4.0%) and 2024 (1.5% - 3.5%) remain unchanged. BI stated that it will monitor any upside risks to inflation, including higher global energy prices, domestic food prices and the pressure from the depreciation of the rupiah on imported inflation.

− Rupiah: As of November 22, the rupiah depreciated marginally by 0.4% against the greenback. This was relatively better than other Asian currencies, which depreciated significantly against the dollar, with the steepest decline led by ringgit (-6.2%) and baht (-2.0%). BI attributed the appreciation to the inflow of foreign capital and positive sentiment in the economic prospects. BI also highlighted continued efforts to strengthen the rupiah in line with its fundamental value and to control imported inflation.

• End of policy tightening amid strengthening rupiah

− The likelihood of another rate hike is reduced due to expectations of manageable domestic inflation, due to the impact of a higher interest rate environment. Additionally, the rupiah has gained traction in recent weeks on the back of a weaker dollar, with the trend expected to continue towards the end of the year. However, the room for further tightening remains susceptible to the value of rupiah, especially if the local note comes under pressure.

− USDIDR year-end forecast (14,730; 2022: 15,573): the local note is expected to strengthen further as we believe the greenback will reverse its gain once the Fed signals a shift in its tone in the December FOMC meeting. The shift is expected if economic indicators indicate a slowdown in the US economy as a result of tighter financial conditions.

Source: Kenanga Research - 24 Nov 2023