ab17 January 2024Global Research and Evidence LabAPAC Economic PerspectivesBI: Patiently holding before the easing cycle beginsThe policy rate was unchanged at 6% p.a., as widely expected Bank Indonesia kept the BI Rate (7-day reverse repo rate) unchanged at 6.0% p.a. at its first policy meeting of the year, in line with consensus and UBS expectations. Two elements of today's analyst briefing suggest that BI has broadly checked the boxes for an easing cycle this year, with only the timing and magnitude of rate cuts left uncertain. First, BI has turned more confident on rupiah stability as it expects a Fed pivot. Second, BI reiterated its confidence that the path of inflation would be well managed within the target range. On growth, BI showed some optimism on domestic demand, reiterating its forecast range for 2024 GDP growth (4.7-5.5%), that is higher than last year's (4.5-5.3%), despite expecting weaker global growth (2023: 3.0% vs. 2024: 2.8%) and a lower forecast range for the current account (-0.1 to -0.9% of GDP in 2024, compared to -0.4 to 0.4% of GDP in 2023). BI expects a Fed pivot to support rupiah appreciationGovernor Warjiyo shared that BI expects three Fed rate cuts this year (same as the median FOMC forecast), all in H2 2024. This is more than the 50bp of cuts expected at BI's December meeting. As a result, as explicitly noted in its policy statement (see here), BI believes the rupiah will strengthen moving forward, with less global uncertainty, lower bond yields in advanced economies, and a milder US dollar appreciation pressure. At the policy briefing, Governor Warjiyo hinted that BI may be countenancing a response to this anticipated Fed pivot. It reiterated that even as monetary policy remains "pro-stability" (i.e. FX stability), BI is now "seeing the possibility", and "becoming more open" in "how to respond to that direction" (of US dollar depreciation and rupiah strengthening). BI turns more confident on inflation and growthIn December, inflation fell to 2.6% y/y (from 2.9% in November), largely reflecting lower food inflation, which slowed to 6.2% y/y (from 6.7% in November). The Governor noted that food inflation is less volatile now, and attributed this to the government's collaboration with local governments to ensure better food supply. BI expects core inflation to end 2024 at 2.1% and headline inflation at 2.8%, within the government's target corridor of 2.5±1%. BI also sounded sanguine on growth. It clarified that macroprudential measures (including liquidity incentives for banks to lend to priority sectors) are its main tool to support growth. Governor Warjiyo also said that BI can continue to use "more granular" targeted liquidity incentives, rather than a blanket RRR cut. BI expects bank lending growth to be around 10-12% y/y in 2024, compared to 10.4% in 2023.The three preconditions for ...
