- BI rate raised by 50bps to 6.50% — Accordingly, the rate on the overnight deposit facility (FasBI) was also hiked 50bps to 4.75%, higher than our expectation and that of the consensus for a 25bps increase.
- Policy tightening complemented by macroprudential regulations on housing loans — The maximum loan to value ratio for housing loans will be tightened to 60% and 50% for second and third houses, respectively, from currently 70%. Property credit grew at around 20% YoY as of May but is concentrated in a handful of banks which in 1Q have seen their mortgage books growing above 30% YoY in 1Q. We think the tighter regulations are prudent and relevant, in light of lower real interest rates which may fuel property buying for investment purposes. (BI estimates currently that around 35K creditors, representing 12.5% of total mortgages, own more than one mortgage).
- Strong BI rate increase likely aimed to give more powerful signal — The higher-than-expected increase follows a $7bn decline in the foreign reserve position to $98.1bn in June. The strong rate hike may help to manage the market’s inflation expectations, which potentially can exacerbate the outflows if not well-anchored. However, it is unclear whether it could go far in reversing foreign fund outflows from the bond market, which have been driven by global fund reallocations.
- Though bond outflows are moderating, supply and FX concerns still holding back appetite — Outflows from the bond market as of the first week July have started to moderate, with foreign ownership levels increasing marginally to Rp285tn (from Rp282tn as of end June). Yet despite BI’s strong measure to raise confidence, risk appetite still seems constrained: bond supply concerns still linger following relatively weak auction results in May and June. There is also perceived uncertainty on the FX side, given further weakening coal prices and slower China growth prospects. IDR also appreciated 4.2% in REER basis ytd in May, under the backdrop of a worsening non-oil and gas trade deficit in April and May.
- A further rise in interest rates is still likely, in our view — In today’s monetary policy statement, BI expects the inflation impact of the fuel price hike to still be felt up to August (after peaking in July); thus we think that another hike cannot be ruled out. We think the BI and FasBI rates may be increased by another 25 bps in August, bringing the total rate increase this year to 100bps. As regards to inflation, from an expected 8.2% this year, we see headline inflation reverting towards 4.3% by YE14. However, we expect the policy rates to remain stable next year, in light of the expected stimulus withdrawal in the US.
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