3 consecutive rate cuts: Sufficient step for now

A further reduced BI rate to 6.75% as expected to help promoting growth

For three consecutive monthly BOG meetings, the central bank cut its policy rate by 25bps for each. In the latest meeting, BI rate was lowered to 6.75% as well as deposit facility rate to 4.75% and its lending facility rate to 7.25%. This is in line with our expectation as well as the street’s estimate. Meanwhile, the central bank has maintained the rupiah and USD-denominated primary and secondary reserve requirement. This is also in line with our view as Bank Indonesia requires some period to evaluate the policy’s implementation. 

BI’s macro guidance: Still optimistic on the 1Q16 GDP growth estimate    

The central bank believes that economic growth should continue to improve in 1Q16, exceeding previous quarter’s level, which could be backed by government consumption and investment. It is worth noting that as of end of February 2016, government’s capital expenditure disbursment reached Rp5.4 tn, much higher compared to 2M15’s position at Rp1.3 tn. Additionally, BI also sees household consumption remains strong, as reflected by the adequate purchasing power, increased retail sales, and relatively good consumer confidence, while pressures on export will persist in line with fragile global economic recoveries. However, we beg to differ with BI’s view. Since Indonesia’s Purchasing Manager Index remained at the contraction mode during January-February, we expect private sector investment to remain subdue, hoping for a pick-up in mid-2016. Therefore, we only foresee the 1Q16 economic growth to reach 4.9% YoY (4Q15: 5.04% YoY).

Monetary policy outlook: Expected a pause move to balance stability and growth       

In the latest release statement, the central bank has indicated that it would be more careful in deciding the next monetary move. The bank will be taking into account overall evaluations and projections of domestic macro economy and financial systems stability, as well as global economic circumstances before reaching agreement for the next BOG meeting. Henceforth, in order to intensify the impacts of policy transmission, the central bank will strengthen operational framework through a consistent term structure of monetary operations in the short-term. At this stage, we reiterate our view that BI rate will be maintained at 6.75% throughout this year. A pause step in interest rate policy is needed to balance the two issues attached to the BI’s monetary measure, the economic growth stimulation and maintaining the Rupiah stability. If BI were to further lower its policy rates ahead, this may put a risk on the sustainability of capital inflows amid external uncertainties in our view. We note that China’s economy, as the main concern of the global investors now days, is still struggling to recover from the structural downturn. Any surprising policy shocks by the Chinese government or its monetary authority as well as disappointing business indicators would jeopardize emerging market currencies, including the Rupiah, against the Dollar.