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Aldian Taloputra, senior economist at Standard Chartered, suggests that they now expect Bank Indonesia (BI) to cut its 7-day reverse repo rate in September, December, and February for a total of 75bps of easing, reaching 4.75% by end-2020.

Key Quotes

“Our new call reflects our revised Fed view that includes an additional cut in September (previously we saw the Fed easing only in December). BI lowered the policy rate 25bps to 5.5% on 22 August, citing below-target inflation and still-attractive domestic yields compared to peers, characterising the move as a pre-emptive cushion for the impact of weak global growth on domestic demand.”

“We think BI will maintain a certain spread of domestic interest rates both against the risk-free rate and those of peer countries, to encourage portfolio inflows needed to anchor Indonesian rupiah (IDR) stability. BI hinted that its August cut is still based on one Fed cut this year and one next year, which implies more room to cut if the Fed turns more dovish than BI expects.”

“Domestic macro fundamentals are still supportive for BI policy easing. We expect Indonesia’s economic growth to increase modestly to 5.2% in 2020 from 5.1% in 2019, on stable consumption and a gradual investment recovery.”

“We believe the BI policy mix, which includes a reserve requirement ratio, macroprudential measures and open market operations, will remain accommodative to maintain adequate liquidity, support loan growth, and deepen financial markets.”