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BI refrained from acting on interest rate at its latest meeting and it is expected to keep the same stance in the next months, suggested Enrico Tanuwidjaja, Economist at UOB Group.

Key Quotes

“Bank Indonesia (BI)’s 7-day Reverse Repo Rate stayed unchanged at 5.00% in November and consequently the Deposit Facility remained at 4.25%, and the Lending Facility at 5.75%… BI said that the policy is consistent with efforts to support the domestic economic growth amidst the global growth slowdown. BI forecast that 2019’s GDP growth is likely to be below 5.2% but will pick up in 2020 in the range of 5.1-5.5%. BI expects Q3 GDP growth at 5.05%. Our 2019 GDP growth forecast remains at 5.1% and to increase slightly to 5.2% in 2020″.

“As expected, BI pursued alternative monetary policy in supporting growth and liquidity via the lowering of banks’ reserve requirements by another 50bps to 5.50% for commercial banks and to 4.00% for Shariah banks (first of such RR reduction was made in June this year). This is aimed to ensure the liquidity is adequate and to stimulate growth recovery. It is estimated that around IDR26trn would be “unleashed” in the domestic financial market”.

“We continue to view that there is a lagged effect from the lowering of interest rates before affecting the real economy via the lowering of credit rates. We view that inflation expectations will increase going forward in view of a likely fuel and related subsidies’ removal. Additionally, the pace of narrowing of the current account deficit (our forecast is 2.8% of GDP, slightly lower than 2018’s 3.0%) would require monetary policy to remain adequately less-loose. We continue to believe that monetary and macroprudential measures would be more effective in supporting growth recovery”.

“Therefore, we expect BI to hold its benchmark interest rate at 5.00% till end 2019. Nevertheless, given our expectations for the US Federal Reserve to possibly reduce its Fed Fund Rate in 1Q 2020, we keep our forecast of one more cut by BI to 4.75% in Q1 2020″.