Kenanga Research & Investment

Bank Indonesia Rate Decision - Surprise 25 bps rate cut signals policy shift to bolster domestic growth

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Publish date: Thu, 16 Jan 2025, 09:49 AM
  • Bank Indonesia (BI) surprises with a 25 bps rate cut, lowering its policy rate to 5.75% at its first Board of Governor meeting for this year, beating house and market expectations
    • Deposit and Lending Facility Rates: Reduced to 5.00% and 6.50%, respectively.
    • BI statement: The decision aligns with low inflation target range of 1.5% - 3.5% for 2025 and 2026, aims to stabilise the Rupiah, and supports economic growth. It signals a policy shift prioritising growth amid global economic uncertainties while balancing Rupiah's stability.
  • Slower growth projected, with stable inflation
    • GDP: BI revised 2025 growth forecast to 4.7% - 5.5%, slightly lower than 4.8% - 5.6% previously, citing weaker exports, subdued household demand, and lower private investment. For 2024, growth is expected to settle slightly below the midpoint of the 4.7% - 5.5%, reflecting softer domestic demand.
    • Inflation: CPI inflation averaged 2.3% in 2024, within the BI's target range of 1.5% - 3.5%. Inflation is expected to remain within target in 2025, supported by ample domestic capacity to meet demand.
    • Rupiah: As of January 14th, the Rupiah has depreciated by 0.4% against the USD since end-2024. However, it outperformed regional peers, including the Thai Baht (-1.7%), Philippine Peso (-0.9%), and Malaysian Ringgit (-0.9%), due to BI's stabilisation measures and foreign capital inflows, supported by attractive domestic yields and positive economic prospects.
  • Further monetary easing expected amid subdued growth and rising external headwinds
    • Policy stance: The rate cut was unexpected as BI previously emphasised that its near-term policy stance is aimed at rupiah stability amid strong USD. The shift reflects a focus on boosting growth amid slowing domestic expansion, low inflation, and rising global uncertainties, including geopolitical tensions, China's weak recovery, and policy changes in the US under the newly-elect President Donald Trump.
    • Room for easing: Bi is expected to continue easing to support economic growth. However, concerns over rupiah stability may lead to a gradual and cautious approach, especially as the US Fed may slow rate cuts due to a resilient US economy. Nonetheless, we expect two more cuts, bringing BI's policy rate to reach 5.25% in 2025.
    • USDIDR year-end forecast (16,050; 2024: 16,221): We expect the Rupiah to gradually strengthen by the end of 2025 on the expectations of lower US policy rate and an improving domestic economy.

Source: Kenanga Research - 16 Jan 2025

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