ECONOMIC UPDATE - What to Expect - Future of Monetary Policy

 

Monetary policy decision and trade balance data

In this month, Fed will give more clarity of their FFR movement in 2019. Fed’s projection should be the guidance for global central bank, including Bank Indonesia, in deciding future monetary stance. Besides Fed, Bank Indonesia’s monetary stance will be also depended to trade data that will be released on Mar 15. Improvement in Indonesia’s trade balance will give hope of a rate cut, with the assumption that Fed will not increase FFR at all in 2019.

 

Fed to reduce its FFR hike projection

FOMC meeting in the end of each quarter will give projection of Fed’s future policy and macroeconomic estimates. The latest projection showed the committee wanted 50 bps hikes in 2019 but the members consistently emphasized dovish statements afterwards. According to Bloomberg world interest rate probability, market expects no FFR hike at all in 2019. US data started to show a slowing down economy that may prevent Fed to continue its tightening cycle. Core PCE inflation was stable below Fed’s target of 2% since October and we see it may weaken even further due to slowing down economy in US and also moderate oil price. On the employment side, the unemployment rate was going down to 3.8% in February (from 4.0% in Jan), indeed. However, the change in nonfarm payrolls declined significantly to only 20k or the lowest since September 2017. We believe Fed will reduce its projection of FFR hike for 2019 from 50 bps to 25 bps in March meeting.

 

Bank Indonesia to be more neutral in future monetary policy

There should not be rate movement by Bank Indonesia in March board of governor meeting. However, we will see further monetary stance of Bank Indonesia after Fed’s new policy projection. In previous meeting, Bank Indonesia lowered its projection of FFR hike in this year from 50 bps to 25 bps and it did not reiterate its hawkish stance in the statement. Current Indonesia’s macroeconomic condition is favorable as the February inflation went down to 2.57% YoY or near BI’s low end target of 3.5% +/-1%. Currency movement is also favorable as Rupiah move within 13,800 – 14,300 range in 1Q19. Forex reserves position was even improved by USD 3.2 bn to USD 123.3 bn in February, showing the high interest rate policy is effective to attract foreign inflow. However, trade balance and current account deficit (CAD) remained negative and we predict trade deficit of USD -717 mn in February due to global slowdown. BI’s main attention was the CAD and global volatility during the interest rate hike cycle. So, it will be very difficult to cut the rate if the CAD remained high.  However, if the February trade balance unexpectedly gives significant improvement, BI may start signaling rate cut by the end of 2019.

 

Export performance to remain subdue but trade deficit to get better

As of March 13, Bloomberg consensus sees February export to have negative growth of -4.55% YoY, import at 0.14% YoY with trade deficit around USD 803 mn. Indonesia export performance should remain to have significant pressure from global slowdown in January. The slowing down sign is even clearer in China which export had significant negative growth of -20.7% YoY and import at -5.2% YoY. Continuing China’s weak economic performance will endanger Indonesia’s export and also CAD and Rupiah in the end. Furthermore, Indonesia’s main commodity products prices see downside risks from current level. Coal price (Newcastle) was down by 7.68% YoY and palm oil declined by 15.89% YoY. On the import side, we expect no much change from Feb-18 figure. Oil price remained subdue (-1.7% YoY) while Indonesia’s manufacturing PMI was stagnant at 50.1 in February. We expect export to have negative growth of -4.2% YoY with import at 0.5% YoY, resulting a slight improvement in trade deficit at USD -717 mn (vs USD -1.16 bn in Jan-19).