• Bank Indonesia (BI) kept its policy rate at 6.25% during its seventh 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 measure to ensure inflation remains under control within the target of 1.5% - 3.5% in 2024 and 2025.” Notably, the statement also added a new sentence specifically focusing on the rupiah, stating "the focus of monetary policy in the short term is directed at strengthening the effectiveness of rupiah exchange rate stabilization and attracting foreign capital inflows."

• Official forecast on GDP growth and inflation rate remained unchanged
  
  − GDP: BI maintains its 2024 growth forecast at 4.7% - 5.5% (2023: 5.1%) as it expects domestic growth to remain strong, backed by robust domestic demand, continued government spending with the fiscal deficit reaching 2.7% and increasing export performance as global external trade improves.
  
  − Inflation: No change in the 2024 and 2025 inflation forecast, with BI still expecting it to settle within its target range of 1.5% - 3.5% (2023: 3.7%). This is partly due to the recent inflation reading slowing to 2.51% in June (May: 2.84%), attributable to an increase in food supply thanks to the harvesting season.
  
  − Rupiah: BI reiterated its commitment to support the local currency, reflecting its cautious stance towards early monetary policy easing. This is because the rupiah remains pressured by the US Dollar appreciation. As of July 16, the rupiah had depreciated by 5.0% compared to the end of 2023, slightly less than the peso (-5.4%). However, the depreciation was higher than that of its regional peers, such as the ringgit (-1.8%), and baht (-3.4%).

• Policy rate to remain unchanged in the short term to support the stability of the rupiah
  
  − We expect BI to adopt a cautious stance on monetary easing, likely waiting for the US Fed to reduce its funds rate, which the market anticipates in September. Additionally, domestic growth is projected to remain stable for the rest of the year due to robust domestic demand. Therefore, we anticipate at least two policy rate cuts by BI towards the end of the year, with the BI rate settling at 5.75%.
  
  − USDIDR year-end forecast (15,631; 2023: 15,493): We revised our forecast from 15,057 considering the current level of rupiah, but BI’s commitment to supporting the local note in the short term, and the US Fed is expected to cut rates as soon as in September due to impending macroeconomic weakness in the US remain as a major driver. Along with a positive economic outlook and attractive yields, we believe the rupiah will gradually strengthen towards the end of the year.

Source: Kenanga Research - 18 Jul 2024