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INDONESIA: VIEW: JP Morgan Sticks With June Rate Cut Projection

INDONESIA
EM BulletAPACEmerging Market NewsBulletIndonesiaMarketsFixed Income Bullets

Bank Indonesia kept rates at 5.75% on Wednesday as was widely but not unanimously expected. With significant volatility in Indonesian markets this week, it put FX stability before growth. JP Morgan believes that the new exporter earnings retention rule should boost FX reserves by mid-year and allow BI to cut rates 25bp in June with possibly more easing in H2 depending on the impact to global growth from US trade policy.

  • JP Morgan points out that “in the MPC statement, although acknowledging the recent decline in US yields and the US$, BI cited elevated US trade policy uncertainty as a key reason to prioritize “external resilience” and to “maintain stability”.”
  • “BI continues to guide for further policy rate reductions to support economic growth. However, we think that growth is unlikely to override FX stability in the central bank’s reaction function in the near term.”
  • “Despite the easing in external financial conditions since late-February, idiosyncratic developments (e.g., weaker coal prices, Jan-Feb fiscal revenue shortfall, budget reallocation, speculation of Finance Minister resignation) culminated in a steep stock market sell-off yesterday, exerting pressure on the IDR.”
  • “BI’s ability to ease in the near term is severely constrained by two key reasons. One, there is significantly less organic support for the IDR via trade and portfolio flows as terms-of-trade (especially coal prices) weaken and rate differentials with the US remain unfavorable. We note that foreign holdings of SRBI have stalled since the January surprise rate cut, which have pulled down SRBI yields. And two, it may take several months for the newly implemented exporter earnings retention rule to boost gross FX reserves meaningfully due to potential US$ redemption by exporters as the previous ruling expires. The recent equity selloff also raises investor concerns on fiscal stability, among other things, making it more difficult for BI to ease.”
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Bank Indonesia kept rates at 5.75% on Wednesday as was widely but not unanimously expected. With significant volatility in Indonesian markets this week, it put FX stability before growth. JP Morgan believes that the new exporter earnings retention rule should boost FX reserves by mid-year and allow BI to cut rates 25bp in June with possibly more easing in H2 depending on the impact to global growth from US trade policy.

  • JP Morgan points out that “in the MPC statement, although acknowledging the recent decline in US yields and the US$, BI cited elevated US trade policy uncertainty as a key reason to prioritize “external resilience” and to “maintain stability”.”
  • “BI continues to guide for further policy rate reductions to support economic growth. However, we think that growth is unlikely to override FX stability in the central bank’s reaction function in the near term.”
  • “Despite the easing in external financial conditions since late-February, idiosyncratic developments (e.g., weaker coal prices, Jan-Feb fiscal revenue shortfall, budget reallocation, speculation of Finance Minister resignation) culminated in a steep stock market sell-off yesterday, exerting pressure on the IDR.”
  • “BI’s ability to ease in the near term is severely constrained by two key reasons. One, there is significantly less organic support for the IDR via trade and portfolio flows as terms-of-trade (especially coal prices) weaken and rate differentials with the US remain unfavorable. We note that foreign holdings of SRBI have stalled since the January surprise rate cut, which have pulled down SRBI yields. And two, it may take several months for the newly implemented exporter earnings retention rule to boost gross FX reserves meaningfully due to potential US$ redemption by exporters as the previous ruling expires. The recent equity selloff also raises investor concerns on fiscal stability, among other things, making it more difficult for BI to ease.”