• Bank Indonesia (BI) kept its policy rate at 6.25% during its sixth Board of Governor meeting this year, meeting market expectations.
  
  − The Deposit Facility and Lending Facility rates were also kept at 5.50% and 7.00%, respectively.
  
  − BI statement: The decision is “consistent with pro-stability monetary policy as a pre- emptive and forward-looking step to ensure inflation remains under control within the target of 1.5% - 3.5% in 2024 and 2025”. It also reiterated that its policy is supported by strengthening monetary operations, partly “to strengthen the effectiveness in the stability of the rupiah exchange rate and foreign capital inflows”. This includes strengthening the interest rate structure in the money market and optimising various securities. Meanwhile, BI continues its loose macroprudential policies to encourage bank lending for businesses and households.

• GDP growth expansion remains intact, while inflation expected to be under control
  
  − GDP: BI expects the domestic economy to remain strong despite global uncertainty, as shown by the positive performance of private consumption and investment indicators. That said, its 2024 growth forecast remains at 4.7% - 5.5% (2023: 5.1%) backed by increasing domestic demand.
  
  − Inflation: BI continues to believe that 2024 inflation will remain within its target range of 1.5% - 3.5% (2023: 3.7%). This is reflected by the latest headline inflation in May which moderated to 2.84% (Apr: 3.00%).
  
  − Rupiah: BI reiterated its commitment to support the local note via various pro-market monetary instruments, aiming to deepen the money market and support the inflow of foreign capital into the country. However, the rupiah remains pressured by the US Dollar appreciation. As of June 19, the rupiah fell by 6.3% compared to the end of 2023. The depreciation was higher than its regional peers such as the peso (-6.1%), baht (-5.1%) and ringgit (-2.4%).

• Policy rate to remain unchanged in the near term in a bid to support the rupiah’s stability
  
  − We continue to expect at least two policy rate cuts in 2024, likely towards the end of the year, with the BI rate settling at 5.75%. This is largely because we expect a rate cut in the US Fed funds rate will boost emerging market currencies, prompting the rupiah to appreciate against the USD which is a key factor in determining BI rate decision. However, we expect BI to take a cautious approach, as the local note remains vulnerable to global financial uncertainty coupled with the rising concern over the fiscal outlook post-election.
  
  − USDIDR year-end forecast (15,057; 2023: 15,493): We maintain our forecast at the moment given the uncertainty of the US Fed policy direction. We believe the rupiah will gradually strengthen towards the end of the year on the anticipation that a reduction in US Fed funds rates will bolster the local currency’s appreciation.

Source: Kenanga Research - 21 Jun 2024