Indonesia Macro Update - BI Rate Update 18 Sep 2024
KBVS MACRO UPDATE
Wednesday, 18 September 2024
BI Lowers BI-Rate by 25 bps to 6.00%
As anticipated, BI has adopted a dovish, pro-growth stance by cutting the BI Rate by 25 bps this RDG at Sep ‘24 to 6.00% (Cons: 6.25%, KBVS: 6.00%, Prev: 6.25%). This decision also led BI to lower the Deposit Facility rate by 25 bps to 5.25%, and the Lending Facility rate by 25 bps to 6.75%.
Additionally, we observe that this policy is underpinned by two main factors targeted by BI: 1) contained inflation, with headline CPI inflation at 2.12% YoY and core CPI inflation at 2.02% YoY in Aug 2024, along with inflation expectations remaining within the lower end of BI's target range (2.5% +/- 1%) for the end of 2024, and 2) the strengthening of the Rupiah by 0.78% (mtd, as of 17 September 2024), which is expected to remain stable, supported by a continued trade surplus and a projected current account deficit of 0.1% to 0.9% of GDP, alongside continued portfolio inflows into the domestic market.
To further support its pro-growth policy, BI is set to: a) promote the optimal use of pro-market monetary instruments, such as SRBI, SVBI, and SUVBI to encourage foreign portfolio inflows into the domestic financial market; b) push for the implementation of BI’s policy mix, including the Macropudential Liquidity Incentive Policy (KLM) in certain sectors and transparency in banking interest rates, both for deposits and lending (SBDK); c) encourage digital economic and financial transactions in society; and d) maintain the stability of the payment system with sound structure and infrastructure.
Looking ahead, we anticipate further BI Rate cuts. However, we expect BI to proceed cautiously, maintaining a pro-stability approach. In addition to inflation and the Rupiah's performance, we believe that other key indicators BI may consider in future BI Rate decisions include: a) the level of foreign exchange reserves, b) developments in the domestic trade balance, c) the yield spread between SUN10Y and US10Y, and d) the volume of foreign capital inflows into domestic portfolios.
Regards,
Fikri C Permana - KBVS Research Team