BI rate: The last tango

BI rate remained to preserve stability for the launching of new benchmark

In line with our estimate but in contrast to the market expectations which believed another series of rate cut by 25 bps, Bank Indonesia has maintained the BI (Bank Indonesia) rate at 6.50% as well as its lending facility rate at 7.00% and its deposit facility rate at 4.50%. We see that short-term macroeconomic stability over external uncertainties should become the central bank top priority in the last BOG meeting. Furthermore, BI also has kept its monetary term structure rates as follows: Tenor 7-day at 5.25%, 2-week at 5.45%, 1-month at 5.70%, 3-month at 6.10%, 6-month at 6.30%, 9-month at 6.40%, and 12-month at 6.50%. Note that, BI will effectively switch its policy rate benchmark to the 7-week Reverse Repo rate on 19 August.     

Global economic outlook: Downside risk to transpire on the impact of Brexit

Similar to the previous statement, the central bank expressed its anxiety regarding the prospect of global economic recovery in particular to the impact of Brexit issue. BI sees the process of British dismantling from EU membership could undermine economic growth in advanced countries as well as several developing countries with strong trade ties to the UK and the EU. Moreover, the stronger Dollar as the bold effect from Brexit has somewhat restrained The Federal Reserve hawkish move. Therefore, BI believes The Fed may postpone its exit strategy to hike FFF rate by the end of this year despite modest improvement in the US economy, in line with our expectation.

BI: 2Q16 GDP growth may pick up but at the conservative pace

On domestic view, Bank Indonesia expects 2Q16 GDP growth may gain but in the modest pace as fragile global economic recoveries have resulted in continued low demand for commodity prices, reducing Indonesia’s exports. Nevertheless, fasting month and the advent of Lebaran festivities in June have quite pushed up retail and car sales. Additionally, BI also note that non-construction investment showed significant signs of improvement backed by higher government capital spending and procurement in 2Q. We concur with the central bank’s view. Hence, we believe 2Q16 GDP growth to reach 5.0% YoY.

Rates outlook: Pending FFF rate hike till 4Q16; Window for further BI’s easing in 3Q16

By assessing current development in the US, Japan, Europe and China, we reiterate our view that most of monetary policies will remain accommodative in the economies mentioned above, with special case on the US. The Fed may raise its policy rate in 4Q16 once macro indicators to boldly improve. At this stage, expected massive capital inflows from tax amnesty’s repatriation, coupled with very controllable inflationary pressure which we believe could be below 3% YoY at end-2016, would warrant BI’s move in further pushing down its Repo rate by 25 bps somewhere in 3Q16 to support 2017 GDP growth.