• In a surprise move, Bank Indonesia (BI) slash its policy rate by 25 basis points (bps) to 6.00% during its ninth Board of Governor meeting this year, defying both market and house expectations
  
  − The Deposit Facility and Lending Facility rates were also lowered by 25 bps to 5.25% and 6.75%, respectively.
  
  − BI statement: BI has now shifted its focus on balancing inflation, the rupiah and growth, adding that, "the decision is consistent with the low inflation forecast in 2024 and 2025, which is controlled within the target range of 1.5% - 3.5%, the strengthening and stability of the rupiah and the need to boost economic growth." This marks a departure from its previous stance which focus on stabilising the rupiah.

• Favourable inflation outlook and continued strengthening of rupiah allows for easing policy to boost GDP growth
  
  − GDP: BI maintains its 2024 growth forecast at 4.7% - 5.5% (2023: 5.1%), but acknowledged that higher growth is needed, signalling stronger efforts to support domestic economy. Growth is expected to be driven by higher investment, robust household consumption, increased non-oil & gas exports and government spending.
  
  − Inflation: BI continues to project inflation within its target range of 1.5% - 3.5% (2023: 3.7%) for 2024 and 2025. This is reflected in the August inflation reading which came in at 2.12% (Jul: 2.13%), which remained low and within target due to an increase in food supply from a bumper harvest season.
  
  − Rupiah: On September 17th, the rupiah appreciated by 1.0% against the USD compared to end-August, although this was slightly below the appreciation seen in regional currencies such as baht (2.0%), and ringgit (1.4%).

• Further monetary easing likely in 4Q24 to boost growth
  
  − BI’s decision to cut rate ahead of the US Fed’s September's FOMC meeting was unexpected, especially given that Governor Perry Warjiyo had previously hinted at monetary policy easing later in 4Q24. We had anticipated a more cautious approach, with rate cuts following the Fed’s policy announcement. However, it appears that BI has gainedconfidence in the direction of Fed policy and opted for an earlier move.
  
  − Concerns about slower growth likely prompted the earlier rate cut, as Indonesia's 2Q24 GDP growth slowed to 5.0% (1Q24: 5.1%), trailing regional peers which had expanded strongly like Vietnam (6.9%; 1Q24: 5.9%), Philippines (6.3%; 1Q24: 5.8%) and Malaysia (5.9%; 1Q24: 4.2%). With growth becoming a priority, we expect BI to implement additional rate cuts in 4Q24 to further support the economy.
  
  − USDIDR year-end forecast (15,631; 2023: 15,493): We maintain our year end forecast, despite the recent gain, with the rupiah trading below 15,400 level against the USD. We remain cautious due to persistent downside risks, particularly the uncertainty surrounding the Fed’s policy direction, the upcoming US Presidential Election, and concerns over the broader health of the US and Chinese economies. These factors could limit rupiah’s potentialfor further appreciation.

Source: Kenanga Research - 19 Sep 2024