MACROECONOMIC ANALYSIS SERIES BI Board of Governor Meeting May 2018

Strong  US  economic  growth  and  deteriorating  trade  balance  position  in  April  triggered selloff  in  Rupiah‐based  assets  and  depreciation  of  USD/IDR  of  around  1.80%  in  the  last month  alone.  Negative  sentiments  surrounding  USD/IDR  exchange  rate  created  pressure  for Bank  Indonesia  to  increase  its  7‐days  Reverse  Repo  Rate,  particularly  from  banks  and participants  in  FX  market.  At  current  prices,  we see  that  Rupiah‐based  assets  are  now undervalued and that global investors will start to buy again once market turmoil has receded. On  the  other  hand,  domestic  economic  indicators,  particularly  core  inflation  and  domestic consumption,  still  shows that  Indonesian  economy is still  not  ready  for  increase  in  benchmark interest  rate.  Decision  to  increase  7‐days  RRR  may  slow  down  credit  growth  and,  ultimately, inflation  and  growth.  Our  view  is  that  Bank  Indonesia  should leave  the  7‐days  RRR unchanged until  June  2018,  after  the  second  Fed  rate  hike.  We  also  see  the  need  for  BI  to  increase  its exchange rate stabilization effort through direct intervention in FX market.

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