Indonesia Macro Update - BI7DRR 17 Feb 2023

The BI7DRRR remains unchanged at 5.75% on 16 Feb '23, in line with KBVS and consensus expectations. This is bolstered by Indonesia's strong macroeconomic fundamentals - notably Jan '23 inflation of 5.3% (yoy), foreign exchange reserves at 6.0 months of imports, government external debt payments, projection of 4Q22 current account to be between +0.4% to +1.2% of GDP, and appreciation of the Rupiah by 2.39% (ytd, until 15 Feb'23) against the USD. In this meeting (RDG), Bank Indonesia (BI) stated that they will implement the Export Earnings Foreign Exchange (DHE) term deposit (TD) instrument, effective on 1 Mar ’23, in addition to the triple intervention and twist operation that have already been implemented to stabilize the Rupiah. Furthermore, the DHE TD instrument will be offered with tenors of 1, 3, and 6 months with an indicative interest rate to be similar to BI’s counterparty overseas. The stabilization of the Rupiah will be part of the effort to control imported inflation, in additional efforts to strengthen the coordination with the Governments in taming domestic inflation. Therefore, we expect BI will aim core inflation to stay within 3% (±1%) in 1H23. However, the cycle of increasing domestic demand during Eid Fitri season, as well as the improvement in purchasing power, will only bring down headline inflation to the BI target of 3% (±1%) by 2H23. Besides global developments and inflation, the resilience of the banking system in driving economic activity, in line with the pro-growth stance, will still remain the focus of BI. This is reflected in the form of the policy of the basic interest rate of credit (SBDK) transparency and the expansion of the digitalization of the payment system. In addition, with the expectation that banking liquidity will remain stable in 2023, we see that BI will still provide macroprudential incentives, in the form of a reduction of Reserve Requirement (GWM) Rupiah for priority and inclusive sectors. Going forward, in order to maintain the stability of the Rupiah and to support the export competitiveness and domestic portfolio, accompanied by the expected 25 bps increase in the Fed rate to 5.25% and 5.50% by Jun ‘23 (see Table 2, page 2), we are of the view that BI will keep the interest rate differential between BI7DRRR and Fed Rate at between 75 and 125 bps until 3Q23.

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