Good timing for BI to cut its rate
Bank Indonesia (BI) unexpectedly reduced its benchmark rate (BI-rate) by 25 bps to 6.00% in September 2024, falling short of both our projections and the market consensus of 6.25%. In line with this move, the deposit and lending facility rates were also lowered to 5.25% and 6.75%, respectively. The rate cut aims to stimulate economic growth amid easing global uncertainties. To maintain the stability of the Rupiah, BI will continue its exchange rate stabilization efforts through interventions in the foreign exchange market, utilizing spot transactions, Domestic Non-Deliverable Forwards (DNDF), and Government Securities (SBN) in the secondary market. Additionally, BI will continue issuing SRBI, SVBI, and SUVBI instruments to attract capital inflows. We attribute this rate cut to favorable macroeconomic conditions, primarily driven by lower inflation, Rupiah appreciation, and robust foreign exchange reserves. Inflation was recorded at 2.12% YoY in August, with 4 consecutive months of monthly deflation. Meanwhile, Rupiah appreciated by 0.78% MtD and 0.40% YtD to Rp15,330/USD, driven by a weaker USD, the dollar index (DXY) fell by 0.73% YtD to 100.60. Furthermore, Indonesia's forex reserves reached a record high of USD150.2 bn in Aug-24, driven by inflows into SRBI (+USD1.05 bn), equities (+USD2.49 bn), and government bonds (+USD 1.85 bn), attributed to expectations of Fed rate cut. On the global front, traders in the federal funds futures market increased the probability of a U.S. Federal Reserve rate cut. As of Tuesday, there was a 63% chance of a 50 bps cut, up from around 40% the previous week, and a 37% chance of a 25 bps cut, according to the CME FedWatch Tool. This expectation of a Federal Reserve rate cut in September may have encouraged BI to act preemptively with a 25 bps cut before the Fed’s decision.
Rate cut as stimulus to boost economic growth
We expect the recent 25 bps rate cut to 6.00% to support economic growth by promoting higher credit growth amidst the concern of weak purchasing power, and help manage the fiscal deficit by reducing SBN yields. Based on the latest data, Indonesia Manufacturing PMI fell to 48.9 in August from 49.3 in July, indicating the second straight month of contraction in factory activity. The latest result was the steepest drop since August 2021, signaling challenges in the industrial sector. In addition, car sales in Indonesia fell by -14.2%YoY to 76,304 units in August 2024, marking the 14th straight month of declining car sales, driven by weak consumer demand. Similarly, retail sales in Indonesia contracted by -0.4% MoM in July 2024, the sharpest decline in a year. Besides, the middle income class in Indonesia fell from 57.33 mn people in 2019 to 47.85 mn people in 2024, In contrast, the aspiring middle income class grew from 128.85 mn people in 2019 to 137.5 mn people in 2024, indicating increasing financial pressure on Indonesia's middle-income population. Looking ahead, we expect BI to cut another 25 bps to 5.75% in 4Q24 , aligning with expectations of a Federal Reserve rate cut in November. We believe this rate could support economic growth to 5.1% for FY24
Global central banks ease monetary policy
The Federal Reserve enacted its first interest rate cut since March 2020, reducing the benchmark rate by 50 bps to a range of 4.75%-5.00%. This decision aligns with market expectations and aims to mitigate a potential slowdown in the labor market amidst easing inflation. The US unemployment rate stood at 4.2% in August 2024, a slight decline from 4.3% in July, though still higher than the three-year average of 3.7%.On the inflation front, the US annual inflation rate slowed for the fifth consecutive month to 2.5% YoY in August 2024, the lowest since February 2021. Similarly, core inflation remained at a three-year low of 3.2% in August. Previously, several other major central banks had already taken similar steps to reduce interest rates. The Bank of Canada has lowered its rate three times by 25 bps each since June 2024, while the European Central Bank cut its rate by 25 bps on June 6, 2024. The People's Bank of China followed suit, reducing its 1-year loan prime rate by 10 bps on July 22, 2024, and the Bank of England cut its rate by 25 bps on July 31, 2024. Looking ahead, we anticipate the global dovish trend will continue into 2025. The Fed is expected to cut rates by 25 bps in November 2024, followed by an additional 100 bps of cuts throughout 2025, bringing the rate down to 3.75% by the end of 2025. This easing global policy rate is projected to support global economic recovery. Consequently, we have slightly revised up our economic growth projection to 5.2% YoY in 2025, supported by this dovish trend across central banks. Additionally, We have revised our average Rupiah forecast, raising it from Rp15,900/USD to Rp15,750/USD for 2024, and from Rp15,650/USD to Rp15,620/USD for 2025.
