• Bank Indonesia (BI) kept its policy rate steady at 6.25% during its eighth Board of Governor meeting this year, meeting market expectations
  
  − The Deposit Facility and Lending Facility rates were also held steady at 5.50% and 7.00%, respectively.
  
  − BI statement: The decision “remains consistent with the focus of pro-stability monetary policy, namely, to strengthen the stability of the rupiah, and is 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.” This clearly indicates the central bank’s commitment to supporting the stability of the rupiah.

• Favourable growth outlook and lower inflation expected to boost the rupiah
  
  − GDP: No changes to its growth forecast despite the higher interest rate environment. BI maintains its 2024 growth forecast at 4.7% - 5.5% (2023: 5.1%), expecting domestic growth to remain firm, supported by increased government spending amid a higher fiscal deficit of 2.7% and a rise in private investment.
  
  − Inflation: BI continues to expect inflation to fall within its target range of 1.5% - 3.5% (2023: 3.7%) for 2024 and 2025. The recent inflation reading moderated further to 2.13% in July (Jun: 2.51%), largely due to an increase in food supply from ongoing bumper harvests.
  
  − Rupiah: BI expects the rupiah to strengthen further, driven by attractive yields, low inflation, positive economic growth prospects and its current policy stance. As of August 20, the rupiah had appreciated by 5.1% against the USD compared to the end of July, outpacing the appreciation of the ringgit (4.7%), baht (4.0%), and peso (3.2%).

• Policy rate likely to stay unchanged in the near term, with a strong chance of easing in 4Q24
  
  − BI Governor Perry Warjiyo indicated during a press conference that the central bank sees room to lower rates in4Q24. This expectation largely stems from BI’s forecast that the US Fed will cut rates twice this year, followed by three cuts in 2025. A Fed rate cut in September could weaken the dollar, aiding rupiah’s recovery. Nevertheless, BI’s cautious approach reflects a desire to avoid premature easing as rate cuts ahead of the Fed could negatively impact the rupiah.
  
  − With steady domestic growth expansion and inflation within the target range, we believe there is no immediate need for BI to ease. However, we still anticipate at least two rate cuts by BI in 4Q24, bringing the rate down to 5.75%, as the current stance is seen as restrictive and potentially limiting economic growth.
  
  − USDIDR year-end forecast (15,631; 2023: 15,493): We maintain our forecast despite the rupiah’s recent strengthening, which saw it trading below 15,500 level against the USD. This outlook is influenced by anticipated global financial instability, driven by uncertainty over the Fed’s policy direction, the upcoming US Presidential Election, and concerns about the overall health of the US economy, which could limit further appreciation of the rupiah.

Source: Kenanga Research - 22 Aug 2024