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ECONOMIC UPDATE - Monetary review - Harnessing momentum



Rate cut by 25 bps to 3.50%

In Feb-21, Bank Indonesia (BI) cut its benchmark interest rate by 25 bps from 3.75% to 3.50% or in line with our expectation and consensus. Market has also expected the rate cut since Governor Perry indicated his preference of the lower rate at some occasions lately. Thus, the deposit and lending facility are at 2.75% and 4.25% now respectively. Main reasons for BI to push the key rate lower comfortably are low inflation and the progress of vaccination supporting the prospect of economic recovery. BI also harnesses the momentum of the current exchange rate stability, on-going economic recovery despite the surge of Covid-19 cases and the ultra-low Fed rate. 


Resilient economy

The external factors showed stronger resiliency reflected by CAD that will get narrower to below 1.5% of GDP where the data will be released on Feb 19th 2021, supported by trade surplus in Jan-21 of USD1.96 bn. The foreign exchange (forex) reserves in Jan-21 was at USD138 bn or equivalent to 10.5 months of imports or 10 months of imports and servicing government external debt, which is well above the international adequacy standard of 3 months. We expect higher forex reserves amid the bond auction in this month. Rupiah also showed more conducive movement lately even it once reached below Rp14,000 to Rp13,915 in Feb 15th 2021. We see the stable exchange rate will remain until at least 1H21 as dollar gets weaker.


Loose liquidity

BI has injected Rp23.8 tn so far this year (vs. Rp750.4 tn in 2020) of additional liquidity into the banking system through quantitative easing. The loose liquidity conditions pushed up the ratio of liquid assets to deposits to 31.5%, coupled with a low overnight interbank rate of 3.0% in Feb-21. Lower deposit and lending rates are expected to persist due to the loose liquidity conditions and the low BI-7DRRR. BI also continues SBN purchase in the primary market. In total, as of Feb 16th  2021, BI has purchased SBN totalling Rp40.8 tn, including Rp18.2 tn through auction schemes and Rp22.6 tn through greenshoe options (GSO).


Loosening the vehicle financing DP to 0%

BI also loosed the provisions for down payment (DP) for vehicle financing to at least 0% for all types of new motorized vehicles. The ease aims to encourage credit growth in the automotive sector while still observing the principles of prudence and risk management. It will be effective on Mar 1st  2021 to Dec 31st  2021. This will be a positive sentiment for the automotive sector as it attracts higher demand for vehicle amid the pandemic.


Lower economic growth expectation

BI also trimmed the economic growth expectation to 4.3% to 5.3% from previous expectation at 4.8% – 5.8%. We see the lower expectation from BI sends positive sentiment as this is more realistic than before especially amid the surge of Covid-19 cases. The new estimate is also in line with our current estimate of economic growth at 4.5% in 2021. Besides, from some indicators above, room for rate cut remains exist in 1H21. However, concerning on the enough spread of real interest rate in Jan-21 (1.95%) with Jan-20 (2.32%) as the pre-pandemic level, we see 3.5% is the most reasonable rate in 2021 as the inflation will be higher eventually. Thus, we expect BI will hold the rate at current level until YE 2021 or until some extraordinary events or shocks happen before the year-ends. For next month, we estimate BI will hold BI-7DRRR unchanged at 3.5%.