● As widely anticipated, Bank Indonesia (BI) maintained its benchmark 7-day reverse repo rate at 6.00% during its twelfth and final Board of Governor meeting for the year

− 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 focus of pro-stability monetary policy namely stabilising the rupiah exchange rate and as a pre-emptive and forward-looking step to ensure inflation remains under control within the target range of 1.5% - 3.5% in 2024.

● BI projects slightly higher growth target in 2024 with lower inflation outlook

− GDP: BI has revised its 2023 global growth forecast slightly higher to 3.0% from 2.9%, citing better-than-expected growth in the US and India supported by household consumption and government spending. For 2024, the global growth projection remains at 2.8%, as BI acknowledge several downside risks including geopolitical tensions, a weaker global recovery, particularly China and the impact of higher interest rates in developed countries. BI anticipates positive domestic growth, as reflected by leading indicators such as consumer confidence, retail sales, and the Manufacturing PMI. That said, 2023 growth target remains at 4.5% - 5.3% (2022: 5.3%). For 2024, BI projects a higher growth target of 4.7% - 5.5%, driven by increased private and public consumption, investment, the upcoming election’s positive influence, and the development of the National Strategic Project (PSN).

− Inflation: 2023 inflation is predicted to settle within the target range of 2.0% - 4.0%. For 2024, BI maintains its target at 1.5% - 3.5%, attributable to the impact of its monetary policy mix and collaboration with the government to control inflation. Nevertheless, BI notes fewer factors likely to disrupt controlled inflation, particularly from food prices, suggesting a downward risk balance in the inflation outlook.

− Rupiah: As of 20th December, the rupiah has strengthened marginally by 0.4% against the US Dollar. This positive movement is attributed to a dovish shift signalled by the US Fed in its last FOMC meeting for the year. Notably, the rupiah’s performance has been relatively better compared to some other Asian currencies, with the ringgit experiencing the steepest decline (-5.7%), followed by baht (-1.2%).

● BI signal higher rates for longer, as it takes a cautious approach in its monetary policy stance to ensure rupiah’s stability and controlled inflation

− Despite a moderation in the latest inflation reading, BI maintains a cautious approach in its monetary policy stance to ensure the stability of the rupiah and controlled inflation. The risk of inflationary pressure remains tilted to the upside, primarily due to potential shocks in the supply side. Additionally, rising geopolitical tensions could hinder the stability of the rupiah, which remains a key factor influencing BI's policy rate direction.

− USDIDR year-end forecast (14,730; 2022: 15,573): the local note is expected to strengthen further, as the Fed already signals a shift in its monetary policy direction. Nevertheless, the year-end forecast may close lower than what we projected, primarily due to the escalation of geopolitical tensions.

Source: Kenanga Research - 22 Dec 2023