CIMB (YU) 14 January 2015
According to consensus, the central bank (BI) is expected to cut its reference rate
by 25bps this Thursday. If this happens, it will be the first rate cut in 11 months.
The sharply falling and benign inflation expectations amid weak growth justify a rate
cut; potential volatility of the rupiah is the main reason to hold back.
With fiscal stimulus and structural reforms picking up since 4Q15, a rate cut might
boost confidence sufficiently to buffer rupiah volatility.
The bank and consumer sectors are key beneficiaries under a rate cut outcome.
A revamped format of BI’s BoG meeting
In a revamped format of its Board of Governors meeting, BI shall hold the monthly event
over two days, rather than one. The first meeting of 2016 will be held on 13-14 Jan. The
first day will involve extensive discussions on economic matters, while the second is for
policy response. BI has invited the Coordinating Minister for Economic Affairs to attend
for the first time. This is allowed under the regulation issued in 1999 but rarely
implemented. The minister can voice his opinion but will not have voting rights.
To cut …
With headline inflation at 3.4% at YE15, at the lower end of its guidance of 4±1%, and
benign inflation outlook, the BI rate of 7.5% seems excessive. Similarly, BI has bettered
its CAD target for 2015, which is likely to come in at less than 2% of GDP. Meanwhile,
GDP growth is at its slowest pace since 2009 and businesses have complained about
the high interest rates. The VP has been particularly vocal in asking for a rate cut.
… or not to cut
Such pressure may have played a part in BI’s changing stance of late, albeit slightly, by
loosening monetary policy through macro prudential measures. Until now, the BI has
held back an outright rate cut, ostensibly to keep the rupiah stable which has cost it
dear. The country’s reserves fell by c.US$6bn in 2015, while the rupiah depreciated by
some 11% against the US$. It is possible that the BI is still somewhat scarred by its
premature decision to trim rates in Feb 15.
The government is doing its part
The Indonesia government under President Jokowi, after a wobbly start in 2015, has
planned for aggressive reforms: notably tax amnesty, following implementation of
equally laudable formula-based minimum wage implementation, friendlier investment
policy and cutting taxes, among others. Business confidence is rising and the rupiah has
indeed been more stable post Dec’s FFR hike. The currency has outperformed other
ASEAN-5 peers YTD, probably due to better domestic confidence and recognition of the
The case for a rate cut…
Separately, the IMF has urged the emerging countries to brace for slower growth by
providing counter cyclical measures through fiscal stimulus, structural reforms and
looser monetary policy. The currency turbulence is inevitably given the divergence of
monetary policies in key large economies. In essence, it says that EM currencies shall
be volatile regardless.
… earlier rather than later
The tumultuous financial environment over the past 24 months shows that there is no
perfect time to institute a more aggressive monetary policy. Given the much improved
macro stability and on-going fiscal stimulus, a rate cut could catalyse growth momentum
further. Given the large real rate spread, a smooth first cut may transpire into a few
rounds of cuts, in our view.
Banks and Consumer sectors to benefit
Lower funding costs for banks and improved consumption have been observed when
rates are cut. Such behaviour should recur. Some beneficiaries of a rate cut include
BBRI, BBNI, BBTN, ASII, BSDE and PWON