Bank Indonesia to deliver first rate cut in Q4 2023

We now expect Bank Indonesia to start cutting the policy rate in Q4 2023, earlier than our previous expectation of Q1 2024. There is still economic slack and high public debt, and a more stable currency and lower inflation look set to encourage an earlier rate cut.

We think the declining growth momentum for the rest of this year justifies the rate cut. We estimate the output gap is negative, and the unemployment rate edged higher in Q1, signalling weakness in the labour market.

What you will learn:

• Moreover, we believe Indonesia’s real interest rate is one of the highest in the Asia Pacific region. As concerns about growth rise, high real rates are not desirable. Even if the central bank wants to keep its monetary stance unchanged by keeping the real rate broadly stable, it will have to lower the nominal policy rate to do so in the declining inflation environment.
• Despite some recent weakness, the rupiah is much stronger than it was late last year and is currently trading below IDR15,000/USD compared to the lowest point of IDR15,740/USD last year. We expect the US Fed has reached the peak in its tightening cycle and the interest rate differential will stabilize, while a current account surplus will support the currency.
• CPI inflation has declined rapidly in the last few months to 4% in May from 5.5% in February. Core CPI is already below the mid-point target. We expect the downward trend to continue amid lower commodity prices, a stronger currency, and favourable base effects.