VIEW: HSBC Sees Risk To Easing From Fiscal Policy

Bank Indonesia (BI) remained cautious given global uncertainties following its August on hold decision. Also its focus for now remains on further rupiah appreciation but it still sees scope for a rate cut in Q4 2024. It left its growth, current account and inflation forecasts unchanged. HSBC notes that BI has begun to normalise policy with SRBI rates lower and indications that flows are shifting to Indonesian bonds. It expects 100bp of BI easing by mid-2025 starting in Q4 2024.

• The main risk HSBC cites to its rate expectations is fiscal policy. While the 2025 budget deficit was unchanged and below the 3% cap at 2.5% of GDP, it could easily be changed when the new government takes over in October.
• HSBC notes “there are some good reasons to ease rates ... Growth has been soft. PMI Manufacturing contracted in July. 2Q GDP remains 7.8% below pre-pandemic levels. Inflation has been falling, now below the 2.5% BI target, and likely to remain at that ballpark for the rest of the year.”
• “...but as many reasons to wait a while longer. … Portfolio inflows into Indonesia may have risen recently, but the trade surplus fell in July (to USD0.5bn from USD2.4bn previously).”