Further easing move: Full throttle to revive the economy

A lower BI rate by 25bp and RRR by 100bp as expected to boost lending activities

In line with our expectation as well as couple of economists’ expectations, the central bank has cut all of its policy rates by 25 bps. BI rate was slashed to 7.00% as well as deposit facility rate to 5.00% and its lending facility rate to 7.50%. Also, similar to our estimate, BI has further lowered the rupiah denominated primary reserve requirement by 100 bps, from 7.5% to 6.5%, effective from 16 th March 2016 (exhibit 2). Additionally, BOG also stated that given this move, liquidity will increase by Rp34 tn in the banking system, supporting 2016 loan growth to accelerate to 14%, higher than BI’s prior target of 12.5%. 

BI’s macro guidance: Positivity is in the air         

In the latest press release, the central bank has signaled an alteration in its several views to be more positive, particularly on the domestic economy. 1) On the GDP growth, 2016 economic growth is targeted to reach 5.2%-5.6% (with the tendency to hover 5.4%) supported by expansive fiscal and monetary stimuli. Meanwhile, lower interest rate environment would also assist private investment to accelerate in line with expected rising domestic demand. We concur with BI’s view. However, since energy and commodity prices should remain at bay, exports to further under pressure. Hence, we believe 2016 GDP to only grow 5.1%. 2) BI expects 2016 current account deficit to remain under control, maintaining at below 3% of GDP due to unfavorable domestic business cycle which has restrained import demand, in line with our estimate. 3) BI also believes inflationary pressure should remain tame on lower fuel prices and a mild El Nino effect on the volatile food component. In addition, BI projects Brent oil at USD37/bbl this year from prior target of 46/bbl, supporting its 2016-2017 inflation target range at 3%-5% YoY. 4) Backed by expected lower-than-expected The Fed rate hike in 2016, emerging markets’ currencies, including Rupiah, may continue to strengthen and stabilize in the short-term.  

Monetary policy outlook: Need for more speed with higher gear     

Given current development, our 6.75% BI rate target should remain intact this year. We are still expecting the central bank to further reduce its benchmark rate by 25 bps in the next BOG meeting on 16-17 March. Moreover, it is possible BI to bring down the rate even lower than our expectation but with several terms and conditions required. First, a lower rate will decrease Indonesia’s premium spread, risking capital flows amid stabilizing financial market recently. Thus, we believe BI would raise easing monetary doses if Rupiah stability would be prevailed on dovish The Fed monetary-bias and continuing ultra low interest rate in Japan and Europe. Second, continued sluggish domestic private investment. If government’s productive spending could not sufficient to push domestic consumption and business activities in 1H16, preventing GDP to grow above 5% YoY level, a more aggressive lower benchmark rate should be necessity.