Jakarta, 25 September 2024 - The United States (US) central bank, The Federal Reserve (The Fed), and Bank Indonesia (BI) simultaneously cut their benchmark interest rates on Thursday, (19/9/2024). The Fed lowered its benchmark interest rate by 50 basis points (bps) to 4.75-5.0%. This cut exceeded market expectations which only predicted a 25 bps reduction.
In line with the Fed's policy, Bank Indonesia (BI) made a similar move by reducing its BI Rate from 6.25% to 6%. In addition, the Deposit Facility rate was cut to 5.25%, and the Lending Facility rate to 6.75%.
Rangga Cipta, Chief Economist of PT Mandiri Sekuritas (Mandiri Sekuritas), said, “BI estimates the opportunity for the Fed to cut interest rates by 75 bps in 2024, higher than the previous month's projection of 50 bps. Bank Indonesia also believes that a faster BI rate cut, compared to the Fed’s, is driven by certainty of US rate cuts, strengthening Rupiah, low inflation, as well as the need to support the economy, fiscal financing and the banking sector.”
“BI expects credit growth to reach the upper bound of its 10-12% target for 2024, with significant contributions from the tertiary sector and job-creating industries. While there has been no indication from BI regarding a reduction in the reserve requirement, they revealed that the 'discounted reserve requirement' of 4% has added liquidity totaling IDR256Tn or 3.4% of third-party funds. This reflects an effective reserve requirement of 5.6% compared to the headline rate of 9%. BI projects GDP growth of 5.1% for 2024 and anticipates potential growth towards 5.2%, or even higher in 2025, driven by more aggressive fiscal spending,” Rangga added.
Meanwhile, Adrian Joezer, Head of Equity Research and Strategy at Mandiri Sekuritas, said, “The Fed’s 50 bps rate cut opens the door for further BI rate cuts. Given the easing of both monetary and fiscal policy, the strengthening Rupiah exchange rate, and the still-attractive stock market valuations, we see a higher chance for the Jakarta Composite Index (JCI) to reach our bull-case scenario of 8,000 by the end of this year.”
“Sectors that are quite sensitive to interest rate cuts and Rupiah strengthening such as financials, consumer staples, and property, as well as small-mid caps remain favored picks,” Adrian added.
Handy Yunianto, Head of Fixed Income Research at Mandiri Sekuritas, said, “Declining interest rates will positively impact the bond market. When interest rates decline, bond instruments become more attractive, as investors can secure higher yields relative to interest rates. The high level of bond yields in Indonesia is attracting not only local investors but also foreign investors. This is further supported by the potential for good economic growth, fairly low inflation, manageable debt levels, and relatively stable political conditions.”
Mandiri Sekuritas also projects that BI will continue cutting rates. It is estimated that a total of 150 basis points of BI rate cuts in this easing cycle, bringing the terminal interest rate to 4.75%, with 75 basis points likely to be cut by the end of 2024. This would bring the BI real interest rate closer to its long-term average of around 1.7%, down from the current 3.4%.
