Bank Indonesia left the benchmark 7-day reverse repo rate on hold at 6% on Wednesday. The central bank expects domestic resilience to offset global uncertainties. Their growth forecast is 4.7-5.5% this year, with a narrow current account of +0.1 to -0.9% of GDP, inflation of 1.5-3.5%, and loan growth of 10-12%. BI governor’s baseline assumption is for the US Fed to lower rates in 2H24 by ~75bp and BI to also consider a similar timeline, implying that Indonesia would not front-run the Fed in lowering rates.
With the disinflationary trend evolving along the BI’s expected path, currency and bond market stability will be pivotal. The focus on maintaining rupiah stability was underscored by the central bank’s ongoing bond purchases. Onshore banks have been main buyers of IndoGBs on YTD basis at IDR49.2trn, followed by the BI at IDR 25.1trn and insurance & pension funds, while foreigners have trimmed their exposure by IDR2.58trn (ownership at 14.7% of outstanding), helping to keep the 10Y yield in the 6.6% region. The recent Presidential election laid the ground for stability and policy continuity, though developments during the transition phase, till the inauguration of the new government in Oct24, might trigger some intermittent volatility. The central bank is also likely to be focused on the spillover risks from global developments and geopolitics (including Red Sea disruptions), while staying on an extended pause. We have pencilled in a likelihood of a pivot towards easing in 2H24, subject to the US Fed’s path.
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