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Stock Index
Bahana Securities

23 Jun 2018 | 07:19 WIB
INDEX
SCORE
POIN
%
COMPOSITE
6.067,087
52,268
0,869%
Last 1 day
IDX30
526,492
3,551
0,679%
Last 1 day
MBX
1.718,699
17,373
1,021%
Last 1 day
DBX
964,133
-1,999
-0,207%
Last 1 day
KOMPAS100
1.248,419
12,390
1,002%
Last 1 day
BISNIS-27
530,769
4,503
0,856%
Last 1 day

Currencies
Bahana Securities

23 Jun 2018 | 07:19 WIB
KURS
BUY
SELL

BI Expected to cut rate in August after termporary pause

At the central bank’s board of governors (BoG) meeting on 20-21 July, Bank Indonesia (BI) maintained its benchmark rate at 6.50% (Bahana & consensus: 6.25%) and the 7-day reverse repo rate at 5.25% (Bahana & consensus: 5.50%), against our and market expectations.

At this stage of the market cycle, the central bank apparently believes that the implementation of monetary easing coupled with fiscal spending has already strengthened Indonesia's economic growth momentum.


Moreover, BI sees a stable economy, supported by manageable inflation, improved CAD and expects stable IDR/USD1 exchange rate to support further recovery.


On the tax amnesty front, BI supports the implementation, which could increase liquidity and infrastructure funding. Finally, BI reiterated its migration rate plan to the 7-day reverse repo rate, which will be implemented on 19 August.


At this point, BI maintains its 2016F economic growth forecast ranging 5.0-5.4% in 2016F (Bahana: 5.1%). In 2Q16, the central bank is looking at GDP growth of 4.94% (1Q16: 4.92%, Bahana: 5.0%), helped by improved household consumption supported higher retail sales index due to Lebaran and higher government expenditure. Furthermore, recent increased commodity prices caused better-than-expected 2Q16 trade balance surplus at USD1.9bn (1Q16: USD1.7bn).


External factors such as Brexit failed to curb fund inflows (government bonds: USD842mn; stock market: USD676.6mn), which benefited from positive tax amnesty sentiment, allowing for improvement on IDR/USD exchange rate with July appreciation at 1.2% mtd (June: 2.5%).


On Fed rate, BI predicts one-rate hike to come by 2016 year-end while our analysis indicates that Brexit is triggering steep drops in global yields worldwide (exhibit 1), but with limited impact on Indonesia given only 1.1% direct export exposure or 4% total exposure to UK.


On the domestic side, recent implementation of tax amnesty has provided positive sentiment to markets. Looking ahead, as we expect global bond yields to continue to remain low, we revise our IDR/1USD expectations to IDR13,500 (previous: IDR14,000) by 2016 year-end and IDR13,000 (previous: IDR13,500) by 2017 year-end.


Going forward, we still project BI to lower its benchmark rate (exhibit 2) on continued low global yields, subdued global growth and weak inflation expectation. As consequence, we already revise down our BI rate projection to 5.75% (previous: 6.25%) and 4.50% (previous: 5.00%) 7-day reverse repo rate by 2016 year-end, translating to 10yr Govt bond yield at 6.50% (previous: 7.00%).


At the moment, we retain our view of a lower interest environment and we expect BI to deliver its next rate cut in August.

Looking at the previous cycle of 2010-2012 economic boom and massive capital inflows, BI was reluctant to have relatively strong IDR and is likely to cut interest rate significantly during period of huge capital inflows.

That said, we conclude that for the financial market, another delay of firm monetary loosening by the central bank should be perceived as negative, resulting in lower growth expectation and inflation figure at the lower end of BI’s target range of 4+/- 1%.

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