Indonesia: July 2018 BI meeting

HIGHLIGHTS

July 2018 BI meeting

• Bank Indonesia kept its 7-day Reverse Repo Rate (7DRRR) at 5.25% after the 100bp increase in May-June.
• BI sees the weaker net export position as a drag on overall economic growth outlook.
• Monetary policy remains biased towards tightening stance amid global uncertainties from US Fed monetary policy normalisation and trade wars.
• The policy focus on rupiah stability implies economic growth would be less likely to get support from monetary policy, at least through 2019F.

Hitting the pause button after 100bp hike…
Bank Indonesia (BI) decided to leave its 7-day Reverse Repo Rate (7DRRR) unchanged at 5.25% after having raised the policy rate by 100bp in May-June. The decision was in line with our and Bloomberg consensus expectation. The Deposit Facility Rate and Lending Facility Rate were maintained at 4.50% and 6.00%, respectively.

… as downside pressure on rupiah subsides
The move came amid some softening of the downside pressure on rupiah. Since the last BI Board of Governors’ meeting, which saw a larger-than-expected increase of 50bp on the policy rate, more attractive yield spreads have reduced the pace of foreign portfolio outflows in the bond market. The weakening of the rupiah was relatively in line with the depreciating trend seen among regional currencies on the back of broad US$ appreciation. The large trade surplus in June also came to its rescue, alleviating pressures on the current account deficit (CAD). We expect higher tourist receipts from the Asian Games as well as the authorities’ plans on import reduction to prevent further deterioration in Indonesia’s CAD position (CIMB forecast: 2.5% of GDP in 2018).

GDP growth restrained by weaker net export position
Given Indonesia’s weaker net export position, the central bank now envisages that the outlook for 2018 economic growth is settling at the lower end of its forecast of 5.1-5.5% (CIMB forecast: +5.3% yoy). BI nonetheless noted a build-up in growth momentum in 2Q18, backed by household consumption and solid investment. Policy coordination between BI and the government has kept inflation rate within the 2.5-4.5% target range, with headline inflation under control during the Lebaran festive month (+3.1% yoy in June).

Monetary policy direction remains biased towards tightening stance
We expect the monetary policy to be guided by external risks, given the US Federal Reserve’s monetary policy tightening cycle and escalating global trade tensions. Indonesia’s trade-to-GDP ratio is low relative to its peers i.e. Malaysia, Singapore and Thailand, insulating the economy from the direct economic impact of US-China trade tensions. Nonetheless, given Indonesia’s higher foreign holding of government bonds and CAD position, rupiah will bear the burden when escalating trade wars trigger flight to safety. Hence, we see Indonesia’s monetary policy direction remaining biased towards tightening stance. The policy focus on rupiah stability implies that economic growth would be less likely to get support from monetary policy, at least through 2019F. We maintain our policy rate forecasts of 5.25% for 2018F and 5.75% for 2019F.

Originally published by CIMB Research and Economics on 20 July 2018.