Too much too soon?
While timing is slightly earlier than our expectation, the second rate cut (7-days reverse repo cut by 25 bps to 4.25%) is in line with our call. Further, we expect BI to pause on rate cuts this year, but shifting the focus on easing macro prudential rules (Loan-to-Value, etc) to support the growth. Next year, we still expect another rate cut as inflation 2018E may come down to 3.3-3.6%.
What are the rationale behind?
- As global volatility remain low and Indonesia macro stability remain benign (highlighted in our previous note), BI take the opportunity before upcoming external uncertainties (i.e. central banks/tapering).
- Reiterating the focus on economy growth. In the press release, BI reiterate that the aim of the rate cut is to support the economic growth (and credit growth). As we mentioned in our previous note (One cut and done?), further rate-cut or easing (higher LTV, etc) is needed to have more meaningful impact to the economy.
Impact to bond market
- Market open with 10 bps lower on 5 and 10 years yield, 20 years yield also go down by 6 bps.
- 10 years yield last traded at 6.22%, 5 years at 5.75% and 20 years at 7.10%.
- The volume is still thin, with bidders mostly have interest on the 5 and 10 years benchmark series.
- The last rate cut will be viewed as positive factors for bond market. We expect the yield curve movement will be flattening to adjust the lower short term rate.
Impact to equity market
- Growth outlook. The lower benchmark rate should help ease funding cost and rates in general, with lagging time to transmit to lending rates. But, it remains to be seen whether it may increase the demand for loan. For now, equity market prefer to ‘wait and see’ on growth outlook.
- Who get the benefit? Interest sensitive sectors, such as bank (especially exposed to fixed lending rate and/or high time-deposit funding) and high leverage companies.