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BI cuts 50bps in line with our expectation

BI cuts 50bps in line with our expectation

  • BI cut policy rates by 50bps, in line with our expectations but more than the 25bps that consensus was expecting.
  • Despite renewed IDR volatility on global risk aversion, we think the growing downside risks to Indonesia's economic activity, as shown by the recent collapse in motorcycle/vehicle sales and much worse than expected export and import growth readings, and easing inflation (8.6% in February) prompted Bank Indonesia to push for another 50bps cut.
  • The accompanying comments look dovish to us, with BI saying that they expect annual inflation to be at the low-end of their 5%-7% range - we are forecasting 6% average this year - and though they expect growth to be at 4%, they see "quite big downside" to its real GDP growth estimate (we are forecasting 3.5% growth this year on expectation of a sharper slowdown in domestic demand).
  • We expect BI will continue to ease towards a terminal BI rate of 7% this year, though downside risks to inflation trends this year could test the policy rate even lower. While we expected that the current 50bps cut will be the last one before they switch to 25bps increments of cuts, the worse-than-expected global backdrop and accompanying dovish statements could tilt BI to frontload the rate cuts and go for another 50bps in April.
    We think BI's view that the pass-thru of IDR volatility on inflation has eased, as well as the country's improved external liquidity position following the US$3bn sovereign bond deal likely emboldened a relatively aggressive easing stance.
  • We don't think the 50bps cut will have a huge impact on IDR spot given that market consensus was not particularly overwhelming, with a few people in the market expecting 50bps as well, and BI has been capping IDR weakness, and should have greater FX reserve ammunition following
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