Bank Indonesia (BI) has once again surprised us with a rate cut at its November 19 meeting – bringing the 7-day reverse repo rate to 3.75%. The move comes after three consecutive months of policy hold, and was underpinned by subdued inflation as well as some stability in the financial market conditions. The central bank has also said the outlook for the current-account deficit is improving, and a surplus in the third quarter is likely.
Governor Warjiyo expects 2020 inflation to remain below the central bank’s 2-4% target range, although a return to the range will be seen next year. Indonesia’s real yield remains one of the best in EM Asia despite the rate cut.
Rupiah has also been in gains this month, up over 3% against the greenback and the best in the EM Asian currency basket, providing room for the central bank to resume policy easing. The decision however weighed on the rupiah which was last seen down 0.7% for the day reversing the week’s gains. More inflows into Indonesian markets remain likely given the improved sentiment from the Omnibus Law and Biden’s victory in the U.S. expected to ease the strained U.S.-China relations. However, the pandemic curve trajectory remains on watch.
Economic conditions remain vulnerable as the pandemic continues to take a toll on activity levels and social distancing restrictions have increased again in several cities. Indonesia slipped into a technical recession with Q3 GDP slumping by 3.49% y/y after a 5.32% y/y contraction in the second quarter. Meanwhile, the effectiveness of the fiscal packages has been reduced due to the delays in disbursements.
We believe BI still has more room to cut interest rates if rupiah stability is maintained, as economic pressures are likely to linger. Accommodative macroprudential policies will also continue.