Indonesia Macro Update - BI7DRR 25 Jul 2023

In line with our expectations, the Bi7DRRR rate was maintained at 5.75% (Cons: 5.75%, KBVS: 5.75%, Prev: 5.75%). This interest rate condition also implies to maintaining the Deposit Facility rate at 5.00% and the Lending Facility rate at 6.50%. We believe this policy is aligned with BI's confidence in maintaining the inflation rate within the range of 3.0% (±1%) YoY until the end of 2023 and softer further to 2.5% (±1%) YoY in 2024. Nevertheless, we also observe that BI starts facing pressures from the domestic real sector, evident in slower loan growth in Jun '23, which only grew 7.76% (YoY), accompanied by potential wait-and-see behavior from domestic businesses regarding investment. Additionally, the possibility of declining external demand, as indicated by lower economic growth and contractionary Manufacturing PMIs in major economies, is a concern that may exert pressure on domestic economic growth. We anticipate that these conditions will compel BI to maintain the three policies, known as the monetary policy trilemma, which involves simultaneous inflation management control (through TPIN-TPID policy coordination), stabilizing the Rupiah (via triple intervention and twist operations), and promoting domestic economic growth (through macroprudential policy stimulus). This situation contradicts conventional monetary policy theories, which typically allow monetary authorities to pursue only 2 out of 3 policy targets. We hope that these measures can be executed effectively, in line with the upcoming implementation of the DHE (Devisa Hasil Ekspor/ Foreign Exchange Export Proceeds) on 01 Ags '23, and the implementation of increased total incentives for RIM (Rasio Intermediasi Makroprudensial/Macropridential Intermediation Ratio) up to a maximum of 4.0% (Prev: 2.8%), targeted towards downstreaming, inclusive financing, and green economy sectors, to be effective from 01 Oct '23. However, we also recognize that BI faces several challenges in the near future. These challenges include: a) the possibility of increasing Rupiah volatility due to the narrowing interest rate differential between BI7DRRR and the Fed Rate, which may lead to a decline in SUN-UST yield spread; b) rising risks of domestic inflation due to the El Nino session; and imported inflation due to higher global energy and food prices; and c) the continuation of a wait-and-see approach from the business sector, influenced by the ongoing dynamic political conditions domestically. Nevertheless, if these three challenges can be managed, we anticipate that BI will able to maintain the Bi7DRRR terminal rate at its current level (5.75%) and potentially lower it by the end of 2023.

Unduh