BI held policy rate at 6.5% as expected — BI’s concluding policy statement was unchanged from last month. The current policy rate was still deemed “consistent” with BI’s 2010-11 inflation target of 4-6% and “conducive” for strengthening the economic recovery, maintaining monetary stability, and supporting banking intermediation.
BI thinks economic fundamentals continue to improve — This is signaled by the improving external sector (reflected by higher than expected BoP surpluses), stronger IDR, price stability and greater economic growth prospects. BI added that exports improvement is not only from commodities but also from manufacturing exports, with CPO considered a manufactured good. Imports also rose as domestic demand and exports accelerated. Externally, BI sees external developments in 1Q10 as constructive, noting that Greece’s financial crisis only had limited impact on financial markets, and capital inflows continued to surge into emerging markets, Indonesia included.
BI more dovish about inflation than before — BI’s Board of Governors maintained that no significant inflation pressure will emerge in 1H10, and in today’s statement it added a more dovish sentence that year-end inflation could be at the lower end of BI’s inflation target range of 4-6%. This is likely encouraged by lower-than-expected March inflation of 3.43%yoy (consensus: 3.7%), representing a 0.14% mom deflation, as the IDR appreciated more than expected and harvest season saw volatile food prices (mainly rice) fall.
We reduce our rate hike call to 50bps this year (fr. 75bps) backloaded to 4Q10
— As a whole, BI appears very reluctant to hike policy rates. On top of today’s dovish statement, recent news that PLN has come up with cost-saving measures as an alternative to the planned electricity hike in July could see lesser inflation pressures from administered prices. We think BI would favor keeping rates low to reduce lending rates and support growth. BI deems Jan-Mar loans growth of 11%yoy as “not yet the growth (it was) hoping for”, and highlights its goal of continuing to improve the effectiveness of the transmission of its monetary policy.
FX reserves continued to rise to US$71.8bn at end March (Feb: US$69.7bn) —
Capital and financial accounts in the BoP continued to see surpluses from attractive IDR yields and lower investment risk. BI estimates FX reserves will cover about 5.8 months of imports and official debt repayments (Feb: 5.7x).
Market implications — BI’s move is widely expected, especially after the March
monthly deflation data last week. Gains in the JCI, IDR and bonds were already observed ahead of the meeting.
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