The Fed’s uncertainty: The old brand new story

Flat policy rates to promote short-term stability on The Fed’s policy uncertainty

In line with our as well as the Street’s estimates, the Board of Governors held the BI Rate at 6.75%, while maintaining the Deposit Facility and Lending Facility rates at 4.75% and 7.25% respectively. In addition, the central bank also disclosed its monetary term structure rates as follows: Tenor 7-day at 5.50%, 2-week at 5.60%, 1-month at 5.80%, 3-month at 6.20%, 6-month at 6.45%, 9-month at 6.60%, and 12-month at 6.75%.

BI’s macro guidance: Revising down 2016 GDP growth target to 5.0%-5.4%       

Due to lower-than-expected 1Q16 GDP reading, Bank Indonesia has revised down its 2016 full-year economic growth target to 5.0%-5.4% from previous estimate of 5.2%-5.6%. Nevertheless, the central bank expects economic growth to pick up in the next quarters, exceeding 1Q16’s level powered by government capital spending disbursement. At the meantime, BI also believes domestic consumption to improve backed by preserved purchasing power as inflation should continue under control, whereas the implementation of government’s policy packages along with low interest rates should boost direct investment ahead. We concur with BI’s view. However, we only project 2016 full-year GDP growth to accelerate to 5.1% (hovers the lower range of BI’s target). We do not believe the government could materialize its productive budget in aggressive way due to concern over possible higher-than-expected short-fall on tax revenue.

The Fed’s monetary policy: A little hawkish stance in the released minutes

Along with better readings on labor and housing markets, The Federal Reserve also saw external risks had somewhat diminished since March FOMC meeting. However, The Fed still put its concern over low inflationary pressure on slumped energy prices and recent weak readings on spending and production. Therefore, some FOMC members stated that the likelihood of June’s benchmark rate hike may be too low. In our view regarding recent The Fed’s concerns on spending and production, we do not see a significant development to warrant another series of rate hike in June. Although retail sales and Univ. of Michigan’s consumer confidence index spiked in April, generally, durable goods sales remained relatively flat, while industrial production did not show a solid development also.   

Policy rates outlook: No rate hike in the US till 3Q16; flat BI’s policy rate through 2016

By assessing current development in the US, Japan, Europe and China, we are of the view that monetary policies will remain accommodative in the economies mentioned above, with special case on US. If business indicators were to boldly improve, The Fed may further raise its policy rate in 4Q16. Low inflation is still the main consideration to conduct more tightening in the near-term in our view. At this stage, we presume that Bank Indonesia will defend short-term macroeconomic stability with maintained policy rates through end-2016.