Bank Indonesia to cut key repo rate by 25bps on Thursday

Analysts at TD Securities expect the Indonesian central bank, Bank Indonesia, to slash the key interest rate by 25bps when it meets this Thursday to decide on its monetary policy outlook.

Key Quotes:

“We expect Bank Indonesia to cut policy rates, likely reducing its 7d reverse repo by 25bps to 4.75% on Thursday 23rd January. This compares to an hold consensus forecast, with only 4 others out of 31 analysts polled (Bloomberg) expecting a 25bp cut. Since the last meeting on 19 December IDR has strengthened by around 2.5% vs. USD while inflation has continued to fall. We think this offers plenty of scope for BI to ease to boost growth.

Headline CPI inflation dropped to 2.72% in December, the lowest since March 19, while core CPI dropped to its lowest since October 2018. As such, real rates have moved higher, offering further room to ease policy.

The strength in the IDR fueled in large part by strong portfolio inflows, especially bonds, was initially welcome and even encouraged, with BI effectively stating that it would not stand in the way of IDR appreciation. But further IDR appreciation has led President Jokowi to warn that gains in the currency "will diminish competitiveness". As such, we think BI may now be inclined to cut rates in order to help take some of the steam out of the currency.”

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