by UOB Group Economist, Ho Woei Chen
JAKARTA - As expected, Bank Indonesia (BI) kept the BI rate unchanged at 6.75% today in line with consensus forecast. 23 out of 26 polled by Bloomberg had forecast the outcome in the rate meeting today. Similarly, the overnight deposit facility (FASBI) rate and lending facility rate were maintained at 4.75% and 7.25% respectively and the new benchmark 7-day reverse repo rate at 5.50%.
This is the first monetary policy meeting since the announcement of the change of its benchmark policy rate to the 7-day reverse repo rate from the BI rate which will take effect on August 19. The change is aimed at improving the transmission of the monetary policy given significant difference in the BI rate and interbank rate. Operationally, BI said that the 7-day reverse repo rate will be determined every month and it will not offer different rates in auctions.
In the interim period, we expect BI to keep various benchmark rates steady to avoid confusion in the market, particularly with regards to the intention of the benchmark change.
In a closed-door meeting hosted by senior central bank officials held earlier this week, BI has emphasized that there is no change in the policy stance and the benchmark change was not a guise to implement a one-off rate cut by moving to a lower 7-day rate. Nevertheless, the O/N lending rate will be lowered in line with the new FASBI-Repo corridor which is set at 150 bps. Based on the current 7-day reverse repo rate at 5.50%, it implies that the O/N deposit facility (FASBI) rate and lending rates will be at 4.75% and 6.25% respectively, thereby lowering the lending rate from 7.25% by August while deposit rate is unchanged.
After front-loading 75 bps rate cut in the BI rate in 1Q16, the central bank said that banking liquidity is starting to improve and showing an impact on banks’ lending rates. Previous concern was the lack of correlation between benchmark rate cuts and the lending rates. Therefore, if the improvement continues, we would expect less likelihood of rate cuts in the later part of the year. Nonetheless, the monetary policy bias is expected to be towards more easing if growth fails to pick up from strongly.
BI expects GDP growth of 5.1-5.2% in 1Q16, up slightly from 5.0% in 4Q15. The 1Q16 GDP is due for release on5-7 May. The current account deficit is expected to ease slightly to 2.2% of GDP in 1Q16 from 2.4% in 4Q15. Nonetheless, we maintain our forecast for a widening in the current account deficit in the later part of the year to bring 2016 deficit to 2.7% of GDP from 2.1% in 2015. This could pressure on the IDR especially in a situation of heightened global uncertainties.
USD/IDR has kept within a range of 13,100-13,200 in the past two weeks. In the short-term, the pair will continue to be guided by factors including oil prices, US Fed hike trajectory and news on Indonesia’s tax amnesty program as well as the review of Budget 2016 in May. (*)