• As widely anticipated, Bank Indonesia (BI) maintained the BI rate (formerly known as the 7-Day Reverse Repo Rate) at 6.00% at its first Board of Governor meeting for 2024
  
  − The Deposit Facility and Lending Facility rates were also maintained at 5.25% and 6.75%, respectively.
  
  − BI statement: It retained a similar tone as the decision is consistent with the focus of pro-stability monetary policy, namely to strengthen the stabilisation of the rupiah exchange rate as well 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.

• Growth and inflation forecasts remained unchanged
  
  − GDP: BI kept its global growth forecast unchanged at 3.0% in 2023 and slowed to 2.8% in 2024. It acknowledges the strong performance demonstrated by the US and India, supported by household consumption and investment. Meanwhile, China's economy is slowing amid a weak property sector and limited fiscal stimulus. On the domestic growth, BI still expect 2023 GDP growth to settle within its target range of 4.5% - 5.3% (2022: 5.3%). For 2024, it retains a 4.7% - 5.5% growth target, driven mainly by domestic demand.
  
  − Inflation: No change to its 2024 inflation forecast. BI maintains its target at 1.5% - 3.5% and reaffirms its commitment to strengthen pro-stability monetary policy.
  
  − Rupiah: The rupiah has continued to depreciate against the US Dollar compared to the level seen at the end of 2023. As of 16th January, the rupiah declined by 1.4%, partly attributed to the heightened geopolitical tensions, particularly the Red Sea crisis. This was further influenced by the diminishing optimism over Fed rate cuts this year given the resilient performance of the US economy. Nonetheless, other Asian currencies are also experiencing depreciation, led by ringgit (-2.1%) and baht (-1.4%).

• BI has room to cut rates, but the timing would likely depend on the US Fed's direction as the rupiah remains susceptible to global financial uncertainty
  
  − Overall, the tone seems neutral, consistent with the house expectation that BI would likely maintain the status quo for an extended period. This is mainly because the risk of inflationary pressure remains tilted to the upside amid the impact of El Nino. Additionally, rising geopolitical tensions could hinder the stability of the rupiah, which remains a key factor influencing BI's policy rate direction. That said, BI is likely to take a cautious approach in its policy stance, and we are pencilling three rate cuts in 2024, likely in the 2H24, settling the year-end BI rate at 5.25%.
  
  − USDIDR year-end forecast (15,057; 2023: 15,493): We still believe the rupiah will strengthen as the US Fed pivot to a dovish stance, signalling to rate cuts this year. Other catalysts include the expectation of a gradual economic recovery in China and a favourable outcome from the 2024 Indonesian General Election slated in February. Nevertheless, the escalation of geopolitical tensions could limit the upside for the rupiah.

Source: Kenanga Research - 18 Jan 2024