Indonesia Data Pulse: Bank Indonesia Maintains Interest Rate

Policy decision - Highlights

Decision

Economic Assessment

Policymakers are more confident on global recovery prospects compared to the last review and are encouraged by China’s reopening (BI forecast: 5.1%). Their baseline assumption is for the US Fed rate to reach 5% and kept on hold in 2023, with a risk of a higher terminal peak of 5.25%.

Domestic growth is seen at the upper end of the 4.5-5.3% range in 2023 (DBSf: 5%). From an estimated current account surplus of 0.4-1.2% of GDP in 2022, the CA Balance is expected to range in the -0.4% to 0.4% of GDP this year, likely on a narrower commodity-driven trade surfeit.

BI drew confidence on the inflation trajectory, highlighting that policy action had helped cap price pressures, with the headline as well as core to return to 2-4% range by 2H23. Rate hikes undertaken to date are not seen as an hindrance to growth, amidst ample rupiah liquidity and only slow passthrough to lending rates. The ratio of liquid assets to third-party funds was still high at 29.1%.

On the policy stance, authorities reiterated that the policy settings were appropriate and response had been pre-emptive to manage inflationary pressures and backstop rupiah stability.

Market implication

Rupiah and IDR bonds witnessed kneejerk gains on BI’s on-hold decision. Focus now is on the risk that the US Fed might raise its terminal rate expectations.

BI reiterates that policy rates have reached their peak

Outlook
Steps to withdraw forex earnings (update)

Bank Indonesia’s new export earnings policy is likely to be effective from March, marked by the introduction of the proposed tool to attract exporters’ FX earnings to the domestic markets

Domestic banks will be required to mobilise these flows from exporters, and in turn park with the BI (which will be invested in the offshore markets, as part of reserves). Governor Warjiyo assured that competitive rates will be provided for these term deposit instruments to incentivise inflows, and are likely to be in the 1, 3, 6 month tenors, with a likelihood that big-ticket deposits could attract higher returns

Authorities added that the decision whether to make the conversion of these export earnings mandatory is still underway. For now, it will rely on the market mechanism to draw back flows

Earlier there were indications that manufacturing sector players will be required to join resource industries (mining, plantation, forestry etc.) to route their FX earnings back home. Market chatter was also that exporters might be required to retain at least 30% of the proceeds onshore for three months in the onshore markets.

herehereEconomic forecasts

2020

2021

2022

2023

2024

GDP growth, % YoY

-2.1

3.7

5.3

5.0

CPI inflation, % YoY

2.0

1.6

4.2

3.7

3.2

Policy rate (eop)

3.75

3.50

5.50

5.75

5.00

Fiscal balance (%GDP)

-6.1

-4.7

-2.4

-2.5

-2.0

Current account (%GDP)

-0.5

0.3

0.7

0.2

-0.5

USD/IDR eop

14050

15655

15320

14900

10Y yield (eop)

6.00

8.00

6.90

7.10

6.70

Financial Markets

1Q23

2Q23

3Q23

4Q23

1Q24

2Q24

3Q24

4Q24

Policy rate

5.75

5.50

5.25

5.00

USDIDR

15640

15530

15430

15320

15220

15110

15010

14900

6.65

6.75

6.55

6.15

5.75

10Y

6.90

7.00

7.10

6.90

6.70

US Fed Funds rate

5.00

4.00

3.50

3.00

US 10Y yields

3.90

3.80

3.60

3.50

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