- Bank Indonesia hit the pause button, to support rupiah and financial market stability.
- Inflation continues to decelerate.
- Real rates deflated by headline and core inflation leaves room to maintain a dovish bias.
- Implications: We retain our call for one more 25bp cut in 4Q24.
- New cabinet with a mix of incumbent ministers and technocrats will bode well for continuity
Hits pause to manage uncertainties.
After delivering a rate cut in September, Bank Indonesia (BI) drew a pause on Wednesday, leaving the benchmark rate at 6.0%, along our expectations. Recent IDR volatility and the central bank’s stepped-up intervention defence to contain the currency’s one-sided weakness, had lowered the scope for a back-to-back rate cut. This also marked a vote for financial market stability just as the new government is set to take office by early next week.
Outlook
BI’s baseline assumption includes US Fed cuts by another 50bp this year and 75-100bp more next year, a tad slower than our forecast. Falling inflation has pushed up real rates deflated by headline and core inflation to at least 150-200bp above the pre-pandemic levels, leaving room to ease rates further. Notwithstanding the over-arching dovish bias, BI’s easing path is not pre-determined, with the timing and quantum likely to be driven by the impact of local and global developments on the IDR asset markets, especially the currency and bond action. We expect another 25bp cut this quarter, subject to a retreat in the US dollar and US bond yields, followed by more next year to take the benchmark rate to 5% by mid-2025.
New government takes office this month.
Current Defense Minister Prabowo Subianto won the presidential election with an outright majority in February 2024 (see report). He is set to take over as the country’s new President from October 20, riding on a campaign focused on economic continuity and social welfare, with a pro-growth bent. In the coming weeks, more clarity will emerge on the new cabinet and its likely reformative path ahead. Few aspects that will be focus include:
-New cabinet might have familiar faces.
-Larger cabinet bench strength.
-Prabowonomics in focus.
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