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Stock Index
Bahana Securities

18 Dec 2018 | 02:42 WIB
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Currencies
Bahana Securities

18 Dec 2018 | 02:42 WIB
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On the cards: A 75 - point benchmark rate cut

At this stage of the market cycle, we believe that there is still room for Bank Indonesia to further cut interest rates, particularly given that June consumer price index (CPI) came in at +3.45% y-y, below our expectation at +3.60% y-y.  This is still on track to achieve our 2016 full-year inflation target of 3.9% (exhibit 1).

June CPI rose 0.66% m-m, but significantly lower than last year’s Ramadhan-related inflation (July 2015: 0.93% m-m) supported by smaller staple foods inflation at +1.62% m-m (July 2015: -2.02%) such as onions and tomatoes, while other components are still on the rise with clothing at +0.70% m-m (July 2015: 0.39% y-y) and processed foods +0.58% m-m (July 2015: +0.51%).

Note that the government has recently decided to allow private importers to import secondary cuts of beef and offal (jeroan) in an attempt to stabilize beef prices. Previously, lower grade secondary cuts of beef and offal were allowed to be imported only by state-owned enterprises, while the private sector was allowed to import lower grade beef only for hotels restaurants and cafes. With the change in regulation, secondary beef can be distributed by private firms to households.

We believe this is positive to ease inflationary pressure on the ground going forward. As a result, we expect that this will encourage BI to continue its loosening cycle.

From the global perspective, recent accommodative policy post Brexit has already triggered 10-yr US T-bills yield to record low at 1.36%, leaving wider real-yield spread between Indonesia and the US, allowing BI to further cut rates.

The last time this low US T-bills yield occurred was in 2012 (exhibit 2) when Indonesia’s inflation was around 4% with BI rate at the time having reached an all-time low of 5.75%. We believe this condition should be favourable for further capital inflows and limited currency depreciation risk going forward.

Under this changing global dynamic, we revise down our interest rate forecast with the 7-day reverse repo rate to be at 4.50% at year-end (previously 5.0%), translating to lower 10-yr government-bond yield target of 6.50% at year-end (previously 7.0%) from current level of 7.2% (exhibit 3).

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