Indonesia Data Pulse: Bank Indonesia Maintains Interest Rate | Bahasa
Indonesia.02 Mar 2023.3 min read
Indonesia, 02 Mar 2023 - Policy decision - Highlights
Decision
Bank Indonesia left the benchmark rate on hold at 5.75% on Thursday, along expectations.
Economic Assessment
Market implication
Outlook
Bank Indonesia left rates on hold along our expectations, as inflationary risks and worries over currency volatility subside. Policy commentary emphasised that action taken till date helped to anchor inflationary expectations, and that the policy was ‘adequate’ to keep core CPI in target. Cumulative 225bps hikes since 2H22 has pushed the real policy rate back to positive territory after ten months. We expect rates to be left on hold in March.
This positive climate is also predicted to be influenced by the re-nomination of the incumbent BI Governor Perry Warjiyo for a second term. This is expected to provide stability thanks to the continuity of previous policies as well as Perry Warjiyo's capabilities in the domestic and international markets.
BI expects the currency to strengthen on better fundamentals, including firm growth, low inflation and attractive real returns. Additionally, response to the Fed’s policy changes is expected to be done via more Operation Twist tweaks, i.e. reflect the US-ID rate premium at the short end of the curve, whilst keeping the long term stable to prevent a sharp increase in financing costs.
BI's baseline assumptions have taken into account the possibility of a Fed rate hike. Intervention efforts will most likely be the first line of defense against the resulting pressure on the rupiah, before revisiting the need for additional rate hikes.
Steps to withdraw forex earnings (update)
DBS Group Research had earlier discussed developments here and here.
Economic forecasts
Financial Markets
Source: CEIC, government sources, DBS
About DBS
DBS is a leading financial services group in Asia with a presence in 19 markets. Headquartered and listed in Singapore, DBS is in the three key Asian axes of growth: Greater China, Southeast Asia and South Asia. The bank's "AA-" and "Aa1" credit ratings are among the highest in the world.
Recognised for its global leadership, DBS has been named “World’s Best Bank” by Global Finance, “World’s Best Bank” by Euromoney and “Global Bank of the Year” by The Banker. The bank is at the forefront of leveraging digital technology to shape the future of banking, having been named “World’s Best Digital Bank” by Euromoney and the world’s “Most Innovative in Digital Banking” by The Banker. In addition, DBS has been accorded the “Safest Bank in Asia“ award by Global Finance for 14 consecutive years from 2009 to 2022.
DBS provides a full range of services in consumer, SME and corporate banking. As a bank born and bred in Asia, DBS understands the intricacies of doing business in the region’s most dynamic markets. DBS is committed to building lasting relationships with customers, as it banks the Asian way. Through the DBS Foundation, the bank creates impact beyond banking by supporting social enterprises: businesses with a double bottom-line of profit and social and/or environmental impact. DBS Foundation also gives back to society in various ways, including equipping communities with future-ready skills and building food resilience.
With its extensive network of operations in Asia and emphasis on engaging and empowering its staff, DBS presents exciting career opportunities. For more information, please visit www.dbs.com.
Decision
Bank Indonesia left the benchmark rate on hold at 5.75% on Thursday, along expectations.
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.
Outlook
Bank Indonesia left rates on hold along our expectations, as inflationary risks and worries over currency volatility subside. Policy commentary emphasised that action taken till date helped to anchor inflationary expectations, and that the policy was ‘adequate’ to keep core CPI in target. Cumulative 225bps hikes since 2H22 has pushed the real policy rate back to positive territory after ten months. We expect rates to be left on hold in March.
This positive climate is also predicted to be influenced by the re-nomination of the incumbent BI Governor Perry Warjiyo for a second term. This is expected to provide stability thanks to the continuity of previous policies as well as Perry Warjiyo's capabilities in the domestic and international markets.
BI expects the currency to strengthen on better fundamentals, including firm growth, low inflation and attractive real returns. Additionally, response to the Fed’s policy changes is expected to be done via more Operation Twist tweaks, i.e. reflect the US-ID rate premium at the short end of the curve, whilst keeping the long term stable to prevent a sharp increase in financing costs.
BI's baseline assumptions have taken into account the possibility of a Fed rate hike. Intervention efforts will most likely be the first line of defense against the resulting pressure on the rupiah, before revisiting the need for additional rate hikes.
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.
DBS Group Research had earlier discussed developments here and here.
Economic forecasts
| 2020 | 2021 | 2022 | 2023 | 2024 |
GDP growth, % YoY | -2.1 | 3.7 | 5.3 | 5.0 | 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 | 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 | 5.75 | 5.75 | 5.75 | 5.50 | 5.25 | 5.00 | 5.00 |
USDIDR
| 15640 | 15530 | 15430 | 15320 | 15220 | 15110 | 15010 | 14900 |
2Y | 6.65 | 6.65 | 6.75 | 6.75 | 6.55 | 6.15 | 5.75 | 5.75 |
10Y | 6.90 | 6.90 | 7.00 | 7.10 | 7.10 | 6.90 | 6.70 | 6.70 |
US Fed Funds rate | 5.00 | 5.00 | 5.00 | 5.00 | 4.00 | 3.50 | 3.00 | 3.00 |
US 10Y yields
| 3.90 | 3.80 | 3.60 | 3.60 | 3.50 | 3.50 | 3.50 | 3.50 |
Source: CEIC, government sources, DBS
About DBS
DBS is a leading financial services group in Asia with a presence in 19 markets. Headquartered and listed in Singapore, DBS is in the three key Asian axes of growth: Greater China, Southeast Asia and South Asia. The bank's "AA-" and "Aa1" credit ratings are among the highest in the world.
Recognised for its global leadership, DBS has been named “World’s Best Bank” by Global Finance, “World’s Best Bank” by Euromoney and “Global Bank of the Year” by The Banker. The bank is at the forefront of leveraging digital technology to shape the future of banking, having been named “World’s Best Digital Bank” by Euromoney and the world’s “Most Innovative in Digital Banking” by The Banker. In addition, DBS has been accorded the “Safest Bank in Asia“ award by Global Finance for 14 consecutive years from 2009 to 2022.
DBS provides a full range of services in consumer, SME and corporate banking. As a bank born and bred in Asia, DBS understands the intricacies of doing business in the region’s most dynamic markets. DBS is committed to building lasting relationships with customers, as it banks the Asian way. Through the DBS Foundation, the bank creates impact beyond banking by supporting social enterprises: businesses with a double bottom-line of profit and social and/or environmental impact. DBS Foundation also gives back to society in various ways, including equipping communities with future-ready skills and building food resilience.
With its extensive network of operations in Asia and emphasis on engaging and empowering its staff, DBS presents exciting career opportunities. For more information, please visit www.dbs.com.