BPAM - One cut and done
Bank Indonesia decided to cut 7-days reverse repo by 25 bps to 4.5% (encouraged by Reserve Bank of India?), is much welcomed as slow economy recovery and government spending. Further easing (rate cut, lower reserve requirement, higher LTV, etc) is likely to happen as BI focus on growth.
What are the rationale behind?
- Improvement in macro data
- Inflation has soften. Latest inflation number showed potential upside risk against market expectation (3.88% YoY in July 2017 vs 4.2% for FY2017E), thanks to low food inflation. The administered price (electricity tariff, 3kg LPG, fuel) hikes seems unlikely to happen (unless oil prices spike up significantly) based on 2018 budget, which should bode well to inflation outlook.
- Manageable current account deficit (CAD) to GDP of 1.5-2.0% in 2017 and 2.0-2.5% in 2018 (vs BI’s threshold 3%).
- Supporting economy growth. With macro stability remain under control, easing monetary policy should act as counter-cyclical tool to help growth. Although, we think that further rate-cut or easing (higher LTV, etc) may be needed to have more meaningful impact to the economy.
Impact to bond market
- IDR government bond yield was down yesterday as investors expect BI to cut rate. Yield for the benchmark were down by 1-5 bps, mostly for the 5 and 20 years tenor.
- There was decent demand on auction before BI meeting which reached Rp46.3 tr. The incoming bid is above average bid of Rp37 T. After auction result, the bond market rallied by 5bps.
Impact to equity market
- Better growth outlook. Counter-cyclical monetary policy (together with fiscal) should (at least) limit the downside risk to growth outlook, which is important for equity investors.
- Who get the benefit? Interest sensitive sectors, such as bank (especially exposed to fixed lending rate and/or high time-deposit funding) and property (next: higher LTV?).