• As widely expected, Bank Indonesia (BI) maintained the BI rate at 6.00% in its third Board of Governor meeting for this year
  
  − The Deposit Facility and Lending Facility rates were also maintained at 5.25% and 6.75%, respectively.
  
  − BI statement: reiterated the same phrase and tone since the end of last year that "consistent with the focus of pro-stability monetary policy, namely to maintain the stability of the rupiah exchange rate as well as a pre-emptive and forward-looking move to ensure inflation remains under control within the target range of 1.5% - 3.5% in 2024." Nevertheless, BI opted for loose macroprudential policies to boost bank lending for businesses and households in a bid to support economic growth.

• Maintained GDP growth and inflation projection
  
  − GDP: BI retained its global growth forecast in 2024 at 3.0%, largely attributed to strong growth demonstrated by the US and India, supported by domestic demand. It also expects a weak recovery in China's economy despite the increased fiscal stimulus. Domestically, BI maintained its growth forecast range at 4.7% - 5.5% (2023: 5.1%) driven by sustained domestic demand. Notably, BI expect subdued exports of goods largely due to the decline in demand from major trading partners.
  
  − Inflation: BI believe 2024 inflation will remain within its target of 1.5% - 3.5% (2023: 3.7%), despite an increase in the headline inflation in February (2.75%; Jan: 2.57%) due to the impact of El Nino, seasonal factors and shifts in the planting season. This is partly because core inflation remained low at 1.68% in Jan (Feb: 1.68%).
  
  − Rupiah: The rupiah has remained pressured by the strength of the US Dollar compared to the end of 2023. As of March 19th, the rupiah fell by 2.1%, but better than the depreciation recorded by ringgit (-2.7%) and baht (-3.4%).

• Higher for longer to support the rupiah, while waiting for the US Fed rate cut cycle
  
  − BI current stance is consistent with the house's expectation that the central bank is expected to maintain the status quo for an extended period to support the fragile rupiah although the inflation rate is under control and rising risk of slower economic growth. BI's governor, Perry Warjiyo has reiterated that reducing policy rates will only happen if the rupiah stabilises and inflation moderates. Likewise, we expect 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): Despite the recent depreciation in the local note following the strong US Dollar, we continue to believe that the rupiah will gradually strengthen towards the end of the year. This is largely based on our anticipation of a 100-125 basis points reduction in US Fed funds rates starting from June 2024. Besides, an expected gradual recovery in China’s economy would also support the local note. However, rising geopolitical tensions may limit the upside bias for the rupiah.

Source: Kenanga Research - 21 Mar 2024