On the way to improve monetary policy transmission

BI rate on hold in accordance with effort to strengthen term structure

In line with our and market expectations, Bank Indonesia has maintained the BI (Bank Indonesia) rate at 6.75% as well as its lending facility rate at 7.25% and its deposit facility rate at 4.75%. This is also in line with the central bank’s previous statement which would prioritize the strengthening of term structure before deciding to further lower benchmark rate. In the latest release, the central bank disclosed its monetary term structure rates as follows: Tenor 7-day at 5.5%, 2-week at 5.6%, 1-month at 5.8%, 3-month at 6.2%, 6-month at 6.45%, 9-month at 6.6%, and 12-month at 6.75%.

BI’s macro guidance: Expect higher GDP in 1Q16 and 2Q16   

The central bank expects GDP growth to continue to improve in 1Q16, exceeding prior quarter’s level supported by government consumption and investment. Additionally, BI also sees household consumption remains solid, as shown by rising retail sales and some pick up in 4-wheeler sales, as well as improved consumer confidence. However, we beg to differ with BI’s view, we believe 1Q16 GDP growth to only reach 4.9% YoY (4Q15: 5.04% YoY) due to stagnant domestic demand and sluggish exports. Moreover, BI foresees that 2Q16 GDP should further accelerate which is driven by investments from government and privates. We concur with BI’s view as we project 2Q16 GDP growth to rise to 5.01% YoY.

New benchmark rate impact: Possible termination of OJK’s time deposit capping

Our Bank Analyst’s channel check in OJK (Financial Services Authority) reveals that the institution is mulling the plan to revoke time deposit cap ruling in responding the implementation of BI's new benchmark rate. It is worth noting that the time deposit cap regulation for BUKU4 & BUKU3 banks is aimed to accelerate monetary policy transmission to the banks' deposit and lending rates. Looking ahead, given an expected lower new benchmark rate (125 bps below current BI rate), we closely embrace the OJK’s study as banks could adjust its cost of funds based on their own liquidity profiles.

Segmented time deposit rate may ease due to abundant short-term liquidity

Admittedly, with market mechanism back to the street for time deposit instrument, there is possibility that competition for gaining liquidity would be back as Loan to Deposit Ratio (LDR) has reached 92%, preventing deposit and lending rates to further decrease significantly. Nonetheless, we are of the view that in an attempt to avoid this undesirable scenario, we hope banks will aggressively issue bonds in 2H16 to match their funding strategies. Additionally, along with further liquidity flush from capital inflows caused by continuing global monetary easing, we believe that segmented time deposit rate should ease, bringing down deposit as well as lending rates, providing strong support for domestic demand to pick up in 1H17. Hence, we will revisit our 2017 macro target especially GDP growth, Rupiah, and current acc deficit ahead.