Indonesia: Approaching tail end of the hike cycle
- Bank Indonesia (BI) raised the policy rate by 25bp to 5.75%, as expected
- Policymakers were encouraged by resilience in domestic growth and peak in inflation
- February’s FOMC will be watched closely
- Implications for forecasts: BI is approaching the tail end of the hike cycle
- Foreign interests are returning to the bond markets
For detailed note with charts, please download the PDF
BI stays the course to hike
Decision and economic assessment
Bank Indonesia (BI) delivered a 25bp hike on Thursday, taking the benchmark rate to 5.75%. With this increase, the 7-day reverse repo rate is back to levels seen before the pandemic in mid-2019. Earlier in the day, Malaysia’s BNM surprised with a pause on rates.
In the post policy comments, Governor Perry Warjiyo struck a cautious note on the global outlook, lowering the 2023 GDP forecast to 2.3% from 2.6% earlier, besides citing a peak in the monetary tightening cycle by major central banks. Views on domestic growth were more upbeat, expecting tailwinds from China’s reopening to offset the impact on trade from slowing US and Europe growth. The 2023 growth estimate was retained at 4.5-5.3%, vs forecast of 5.2% for 2022 (DBSf: 5.4%).
Reiterating that BI was committed to its inflation-targeting mandate, headline inflation is expected to ease below 4% in 2H23, with core inflation capped at 3.7% in 1H.
The currency’s recent outperformance was also highlighted (rupiah ytd +3% vs USD, second best performer vs peers), as the IDR benefited from a resumption of foreign flows into the debt markets. This will be backed by 2022 current account, which is likely to post a strong +0.4 to 1.2% of GDP, before moderating to -0.4% to +0.4% range in 2023 (vs our forecast for a small surplus).
BI maintained on Thursday that its policy was ‘pre-emptive and frontloaded’, to address inflationary risks. Governor Warjiyo signalled that the string of hikes since Aug22 were ‘adequate’, encouraged by the earlier-than-expected moderation in inflation and recent recovery in the currency. These will feed market expectations that the domestic policy tightening cycle is near its end.
We retain our call for a last 25bp hike in February as a buffer against volatility in the financial markets and to support the currency. Admittedly, Thursday’s comments increase the probability that policymakers view 5.75% as the terminal rate, leaving the real rate (benchmark rate minus inflation) in the black in 1Q23. Nonetheless, before drawing a brake on the rate hike cycle, we expect policy guidance at the February FOMC to be watched closely as a potential catalyst for financial markets’ price action (bonds and US dollar). An outright dovish tone by the US Fed will deter BI from further hikes.
Concurrently, BI is expected to retain its multi-pronged presence: a) operation twist operations to lift short term yields, while long-term rates stay anchored; b) keeping an eye on the bond markets even as foreign interests return; c) bond holdings worth IDR 1450trn will be utilised for monetary operations; d) ensuring rupiah stability.
Moves to boost FX liquidity
Plans to attract FX liquidity back to the onshore financial system continue to be a priority. Back in Dec, BI had outlined plans to introduce a new FX monetary instrument intended to attract export dollar earnings to the onshore markets by offering competitive returns. The provision of mandatory repatriation of foreign currency is set to be expanded to include manufacturing activities. This is applicable to commodity sectors for the time being, including mining, farm/ plantation, forestry, and fishery etc. Indications are that the duration of three-month period for which export proceeds need to be kept onshore might also be revisited. Separately, banks will be exempted from setting aside funds under RRR for export proceeds received as deposits.
For comparison, Malaysia requires export proceeds to be repatriated immediately upon receipt of payment, six months from the date of shipment or extended up to 24 months on extraordinary circumstances, according to the BNM. Additionally, if the payment for proceeds of export of goods is received within 6 months from the date of shipment, then additional approval from the central bank is not required.
For Indonesia, higher domestic FX availability will support the currency and lower associated borrowing costs for the financial sector. Low returns have deterred foreign currency liquidity from returning to the domestic markets, despite a strong goods trade surplus year-to-date and record investment flows.
To read the full report, click here to Download the PDF.
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
This report has been prepared by a personnel of DBS Bank Ltd who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.