Our View on Bank Indonesia Policy Rate
We expect Bank Indonesia to hold BI 7 Day Reverse Repo Rate at 3.5% with Lending Facility Rate at 4.25% and Deposit Facility Rate at 2.75%. After all the easy policies taken by central bank, now BI should focus on its mandate maintaining rupiah stability. Although downside risk escalates amid Covid-19 cases surge, here are 5 reasons why BI needs to hold the policy rate at current level.
No Room for Further Rate Cut
BI has cut 150 bps of benchmark interest rate or equal with FFR cut since Covid-19 pandemic strike, hence we believe that there is no room left for further rate cut. In addition domestic central bank also has taken easy policy through liquidity injection in banking system as well as enacting accommodative macroprudential policy to support economic recovery agenda.
Expecting Banks to Lower Loan Rates
Despite monetary transmission continues, declining banks interest rate remained limited compared to lowering deposit rate and benchmark rate cut. Loan disbursement stayed in a contractionary zone while banks liquidity is maintained ample. We understand that banks risk management is justified yet we believe that banks still have a room for further declining interest rate.
Maintaining a Positive Real Rates
Historically BI kept a 150-200 bps real positive rates. With low and stable inflation as well as at current level benchmark rate, domestic financial assets offer lucrative valuation thus favoring foreign fund flows.
Pressure on Rupiah
Emergency Public Activity Restriction (PPKM Darurat) implementation triggered by Covid-19 cases spike has pressured rupiah recently. Rupiah’s depreciation against USD has pushed the domestic currency to be traded near the upper bound of its fundamental value.
The Fed Possible Monetary Normalization
Solid U.S macro data released has indicated that economic recovery is real driven by aggressive vaccination campaigns as well as accommodative macro policy approach taken by government and central bank. Although the Fed repeatedly confirmed its accommodative stance as the risk of uncertainties linger, if jumping inflation figure is persistent and solid data are coming ahead, we believe central bank’s tapering off discussion widely opened.
Disclaimer
