Macro & Market Perspective
Topic : Monetary Policy I September 23, 2022
Catching up with the Fed
Key Takeaways
• BI surprisingly raised the benchmark
policy rate by +50 bps to 4.25% on
Sep-22 meeting, higher than consensus
estimate of +25 bps to 4.00%.
• BI emphasized that interest rate hike is
needed reflecting front-loading, pre-
emptive & forward looking policy to
bring back inflation at a desirable level of
2-4%.
• BI expect headline and core CPI to
increase >6% & 4.6% this year due to the
increase in subsidized fuel prices.
• BI said that recent IDR depreciation was
driven aligned with peers due to
strengthening the USD index.
• BI also has other policy mix to promote
stability mainly through reserves
requirement & policy rate hike as well as
operation twist.
• Given the high possibility of Fed to raise
their benchmark rate further and in order
to safeguard interest rate parity while
anchoring as well as maintaining IDR
stability, we expect 7-day reverse repo
rate to be brought to at least 5% for
FY22E.
Tirta Widi Gilang Citradi
Economist & Fixed Income Analyst
tirta.citradi@mncgroup.com
MNCS Research Division
A. Higher than expected rate hike
Domestic central bank raised 7-day reverse repo rate by +50 bps to 4.25% on Sep-
22 meeting following Fed’s decision to increase borrowing cost by another +75
bps. Such policy measure was higher than consensus estimate that projected the
reference rate to be raised only by +25 bps. Furthermore, BI’s respond seemed to
be a quite surprise since the first rate hike in Aug-22 as majority of economists
agreed that domestic central bank will hold low interest rate policy a little longer.
Nevertheless, BI emphasized more on the urgency of front-loading, pre-emptive &
forward looking policy to bring back inflation at a desirable level of 2-4%. However,
we understand that the urgency for interest rate hike is increasing on the back of :
1) potentially higher than upper target of CPI; 2) outflows & continued IDR
depreciation against USD.
B. BI articulated some guidance for future interest rates
BI said that both headline & core CPI are likely to increase above its target this
year, largely driven by subsidized fuel price adjustment taken by government. Note
that last month Pertalite & Diesel fuel price were set to increase >30%. Given the
stubbornly high global oil price & rising subsidized fuel price, headline & core CPI
will likely to increase to >6% & 4.6% respectively with the effect will last for 3
months. Through the rate hike, BI expect core CPI as the main inflation gauge to
slowdown <4% at least by 3Q23. Furthermore, responding to IDR stability, BI said
that recent IDR depreciation was aligned with other EM & DM currencies
performance caused strengthening the USD index. BI projected CA balance to be at
-0.5%-+0.3% GDP for FY22E, thus expecting IDR fundamentals to remain solid.
C. Other policy mix to promote stability
Indeed, BI has officially started the tightening cycle since Aug-22, yet prior to
recent interest rate hikes, BI has two other policies two promote stability namely
liquidity management and operation twist.
• Liquidity management : BI has decided to absorb excess liquidity through
raising reserves requirement to 9%. Rising reserves requirement is estimated to
have absorbed IDR269tn liquidity from the banking system, in-line with our
estimate of IDR234-319tn. Furthermore, BI also ensured that liquidity to remain
adequate and will not affect banks capability to disburse loan and participate in
government financing.
• Operation twist : BI also conduct another monetary by selling shorter
government bonds while buying longer maturities. We noted some implications
from the monetary policy conduct. First, higher yield for shorter maturity
government bonds will give more attractive valuation as investors to likely
shorten their portfolio duration during interest rate hikes period. As such, could
also favorable for foreign portfolio inflows and help to promote IDR stability.
Second, through operation twist, government bond yield curve may flatten
indicating that high inflationary pressure is expected to be temporary. Hence
financing cost particularly for the long term could be still manageable. On the
other side, operation twist should provide better interest rate corridor for
market participants.
D. Expecting more rate hikes to come
Going forward, we see BI will further raise the benchmark rate to safeguard interest
rate parity as Fed position themselves against market expectation. Downside risks
stemming the US economy from aggressive rate hikes have caused market
participants to expect rate cut next year, yet FOMC participants see it differently as
they weigh on stability than growth. Note that based on FOMC summary of
economic projection for Sep-22, the committee saw FFR to be at 3.9-4.6% for
FY22E implying another 75-150 bps rate hikes in the rest two meeting and at 3.9-
4.6% for FY23F. All in all, after considering the domestic inflation & IDR stability
outlook as well as Fed’s guidance, we projected 7-day reverse repo rate to be
brought to at least 5% for FY22E.
Page 1
 Macro & Market Perspective
Topic : Monetary Policy I September 23, 2022

Exhibit 1. BI tried to catch up with the Fed Exhibit 2. Domestic real rate has been consistently declining

FFR 7-day reverse repo Spread Avg

7.00 3.00

6.00 2.50
5.00
2.00
4.00
1.50
(%)

(%)
3.00
1.00
2.00

1.00 0.50

0.00 0.00
Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Apr-21 Apr-22

Sources : Bloomberg, MNCS Research Sources : Bank Indonesia, Statistics Indonesia, MNCS Research

Exhibit 3. Net portfolio flows vs IDR depreciation against USD Exhibit 4. Government bond yield curve

15,200 40

20
15,000
0
Monthly Average USD/IDR

Portfolio Flows (IDR Tn)

14,800
-20
14,600 -40

14,400 -60

-80
14,200
-100
14,000
-120

13,800 -140
Aug-20 Feb-21 Aug-21 Feb-22 Aug-22

Sources : IDX, DMO, MNCS Research Sources : Bloomberg, MNCS Research

MNCS Research Division Page 2

Macro & Market Perspective
Topic : Monetary Policy I September 23, 2022

MNC Research Industry Ratings Guidance

OVERWEIGHT: Stock's total return is estimated to be above the average total
return of our industry coverage universe over next 6-12 months
NEUTRAL: Stock's total return is estimated to be in line with the average total
return of our industry coverage universe over next 6-12 months
UNDERWEIGHT: Stock's total return is estimated to be below the average total
return of our industry coverage universe over next 6-12 months

MNC Research Investment Ratings Guidance

BUY : Share price may exceed 10% over the next 12 months
HOLD : Share price may fall within the range of +/- 10% of the next 12 months
SELL : Share price may fall by more than 10% over the next 12 months
Not Rated : Stock is not within regular research coverage

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MNCS Research Division Page 3