Expecting Interest Rates to be Kept Unchanged
We believe BI would hold its key interest rates unchanged in August-21 two days policy meeting to be held on Wednesday-Thursday this week. BI 7 day reverse repo rate would be left at 3.5% or the lowest level in history, while lending facility as well as deposit facility to be kept at 4.25% and 2.75% respectively.
We noted that during the implementation of PPKM Darurat and later be named as PPKM Level 4 in Java & Bali region has shown to be costly for economy. Manufacturing PMI data contracted to 40.1 in July-21 (Exhibit 3), while consumer confidence plunged to 80.2 in the same period (Exhibit 4). Inflation remained benign. July-21 CPI figure rose 1.52% YoY (Exhibit 5) despite ample liquidity in the economy. Lower inflation below central bank’s target can be explained by lower money velocity induced by public mobility drop. This low inflationary pressure we expect to persist in August as the social restriction measures prevail.
Looking at those bleak data doesn’t mean that BI still have room to further cut the rates. Since the pandemic began in March-20, BI already cut the benchmark rate 6x each 25 bps totaling of 150 bps (Exhibit 6). BI also take another level of easing by injecting liquidity to banking system, involving in government budget financing program as well as enacting accommodative macroprudential policy.
As of July 19, 2021 BI has injected IDR101.1tn worth of liquidity to banking system under QE program. The total amount of QE taken by domestic central bank now stood at IDR827.7tn or equivalent to 5.4% GDP since last year. In addition BI also has bought IDR124.13tn of government bond as of July 19, 2021 which came from primary auction (IDR48.67tn) and from GSO (IDR75.46tn). Accommodative macroprudential policy is also taken by lowering LTV and DP for mortgage and auto loan.
Those all are part of BI pro-growth and stability strategy in response to pandemic induced shortfall. Moving forward we expect BI to maintain its coordination and synergy among government institution under KSSK (OJK, MoF and LPS) to support economic recovery while at the same time maintaining stability.
So far Indonesia’s financial assets were stable under this policy. Rupiah is currently traded within its fundamental value (Exhibit 7) and 10 year Indo GB yield remained fairly valued (Exhibit 8). Cutting another 25 bps of interest rate would be risky and could send rupiah to depreciate against USD which would only seen as contradictory to the central bank’s mandate.
Furthermore, by the end of this year the Fed would likely to begin its tapering off indicating the first step of monetary policy normalization amid persistent higher than expected inflation figure. Recent interview with the Fed officials have shown that some hawkish view has been clearly articulated. Fed Governor Christopher Waller and Fed bank Presidents Eric Rosengren, Robert Kaplan and Jim Bullard have publicly called for a September taper. Atlanta’s Raphael Bostic supported to begin the taper sometime between October and December. Given the possible earlier than expected tapering, holding the interest rate unchanged would be the wise choice for BI to prevent a massive outflow that would only threatening the stability.
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