At Wednesday’s policy meeting, Bank Indonesia Governor Warjiyo cautioned over a shift in global dynamics since the last review, with several uncertainties on the horizon. BI expects the US Fed to lower rates by a measured 50bp next year, with a risk that the US may implement higher trade tariffs from 2H 2025. On the domestic end, growth and inflation were seen evolving around expectations. Inflation was expected to be within the target in 2025-26, while GDP seen in a firm 4.7-5.5% this year (DBSf 5%). Loan growth forecast was also kept in a 10-12% range, while macro stability was underscored by a modest current account deficit projection of -0.1 to -0.9% of GDP. Despite a positive domestic picture, the fallout of global uncertainty on the currency and rise in yields convinced the central bank to vote for financial stability and extend its pause on rates for a second consecutive month.
Compared to 75bp YTD cuts by the US Fed, the BI rate is down by 25bp this year. A shift in the BI’s expectations of the US Fed rate cycle and wariness over its impact on the rupiah/bonds, alongside uncertainty over the implications of the US election on the region, is likely to dissuade the central bank from lowering rates further this year. We expect the benchmark rate to be held unchanged in rest of 2024 (vs forecast for a 25bp cut previously), with further 75bp cuts in 2025. In the interim, a reduction in the Reserve Requirement Rate might be considered to provide liquidity (LDR ratio has been rising), without perturbing the currency. Macroprudential measures to sectors will also be handy to underpin credit growth. As US yields rise, the Indonesia OMO curve has re-steepened. BI is likely to continue deploying tools available under the triple intervention strategy (spot, DNDFs, and bonds), while also gearing up the interest rate policy to keep FX stability.
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