FOMC:

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 The Federal Open Market Committee (FOMC) raised the fed funds rate by another 50 bps, bringing the policy rate to the range of 4.25 – 4.50% which brings rate hikes throughout 2022 to a total of 425 bps. The season-ending FOMC meeting also comes with updated economic projections, which signals more rate hikes coming in 2023 as a majority of FOMC members are now looking at somewhere around 5.25% as the terminal rate in the current tightening campaign, up from around 4.6% that the committee projected in September 2022.

 The FOMC also downplays the prospect of a ‘Fed pivot’ in 2023, signalling that the policy rate would remain considerably restrictive for an extended period which echoes its expectation of rather sticky inflation. Equally notable is the adjustment in the US economic growth projection, with the economy now expected to grow by 0.5% in 2023, down from 1.2%

previously. The new forecast still illustrates the Fed’s optimism in delivering a soft-landing scenario, albeit with considerable pain, as illustrated in the upward revision to the FOMC’s median expectation of the unemployment rate.

 The Fed’s decision to slow its tightening campaign by a notch is hardly news. But the central bank’s still-hawkish outlook may surprise some in the market. Indeed, many in the market have been vigilant of signs of a weakening US economy, hoping that such a development would encourage the Fed to change its bearing. The lower-than-expected CPI figure in November, which portends a widespread slowdown in consumption, strengthened the market’s confidence that the Fed would stop its tightening campaign before it breaches the 5% Highmark. This, however, may not be the case as the Fed seems set to double down on its effort to yank inflation back to the target level.

 Weakening demand is a worrying sign, especially for a consumer-driven economy such as the US. There’s also an issue with the structure of the US labour market. Indeed, large number

Executive Summary

 The Fed raised its target rate by 50 bps which sent the fed funds rate to the 4.25 – 4.50%

range. FOMC members now see the terminal rate at around 5.1%, while the US economy is expected to narrowly avoid a recession scenario.

 Still-high inflation coupled with stable domestic financial and corporate sectors may encourage the Fed to continue hiking rates. But weakening demand and still-mercurial energy prices might complicate the Fed’s effort to deliver on its tighter-for-longer outlook.

 We expect BI to hike towards 5.50% by year-end, with an additional 25-50 bps hike in 2023 to compensate for the IDR’s weakening-but-still positive sentiment.

A season of caution and compromise

15 December 2022

Lazuardin Thariq Hamzah Economist/Analyst

Barra Kukuh Mamia Senior Economist

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of jobs gained throughout the post-pandemic months have been in lower-skilled occupations, which is quite susceptible to a drop in economic confidence considering its more cyclical nature. It would be crucial for the Fed, then, to safeguard demand, especially in the still- cheerful service sector. Alas, the Fed’s monetary-side arsenal may not provide the booster needed to push the economy out of the gravitational pull of worsening confidence, as interest rates at 3 or 4% would hardly encourage people to spend.

 At the same time, the Fed is still fighting its old nemesis – the weakening-yet-still-lofty inflation.

Indeed, a stable domestic financial and corporate sector provides the avenue through which the Fed could continue to hike rates. But higher rates would also stymie shale producers, which could translate to another upward swing

in energy prices, especially when the US government comes back to the market to fill the SPR. The Fed is indeed facing an impasse, it may have headed to the water but it remains unclear whether or not the central bank could cross its Rubicon. The decision to revert to a more gradual hike in 2023 may signal the Fed’s readiness to work on a compromise;

increasing the policy rate more steadily would help the Fed to find the optimal (minimum) level where the real rate of return would tip back to positive, avoiding the risk of over- tightening.

 The Fed’s softening hike trajectory had deflated some of the USD’s muscle, but its rather hawkish talks may halt further depreciation in the USD value. Many central banks, then, is still under the urgency to tighten. Indeed, in an announcement scheduled later this day, the ECB and the BoE are expected to hike their policy rate by 50 bps, while the Swiss National Bank already increased its policy rate by 50 bps to 1.00%. A tighter policy rate would be crucial for these European (and many others) central banks to limit the downward pressure against their currencies amid the still-dominating USD. Alas, such a policy call would also prolong the winter of economic (and political) discontent that now brewing in Europe.

 In contrast, Bank Indonesia will reconvene next week for its final meeting of the year against a more colourful backdrop. The IDR’s value has stabilised throughout December, courtesy of favourable development in the global commodity market that allows the Indonesian economy to maintain its outsized trade surplus. Foreign capital starts to flow back to the Indonesian bond market but the still meagre foreign ownership would insulate the IDR from the full brunt of the Fed’s hawkish talks. However, as we previously noted, the slowly-normalising coal prices coupled with a more neutral CA next year may continue to gnaw at the IDR’s value. BI, then, may look to hike the BI 7DRR by 25 bps in the upcoming meeting, ending the year at 5.50%. We expect BI’s rate hike cycle to finally cease in early 2023, but further 25-50 bps hike after the New Year are still not impossible at this point.

“Higher rates would stymie energy producers, which could translate to another

upswing in energy prices

(and inflation)”

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Source: Bloomberg, BI

Source: US BLS, Bloomberg

% YoY

Panel 1. Fed hikes are expected to continue into 2023, but Indonesia maintains healthy nominal yield spreads versus the US especially in the longer end

3.13 3.38 4.11

3 3.5 4 4.5 5 5.5

Jan '23 Aug '23 Apr '24 Nov '24

15-Dec-22 30-Nov-22 31-Oct-22

FFR Futures, per:

7.11

0 2 4 6 8 10

Jan-21 Aug-21 Mar-22 Oct-22

Services less energy services Core goods

Energy Food CPI (YoY)

%

2.7 2.6

-1 0 1 2 3 4

Jan-05 Sep-10 May-16 Jan-22

Expected US inflation:

― Breakeven (Tsy-TIPS 5Y)

― Swap 5Y/5Y

Panel 2. The long-run expectation of US inflation remains well-anchored but the inflation expectation remains stubbornly high due to some sticky components

4.724.66 4.41

4.19 4.20

6.06 6.35

5.61 5.88

6.42 6.13

6.86

3 3.5 4 4.5 5 5.5 6 6.5 7 7.5

0 2 4 6 8 10

US yield curve

Indonesia yield curve

%

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Source: Bloomberg

Source: Atlanta Fed

Chart 1. The FOMC still expects a soft-landing scenario, but the spectre of recession has become more apparent

Chart 2. GDP nowcast points to slowing demand amidst strong GDP print

2.4 1.2 2.8

-2 0 2 4 6 8 10

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22

anomaly during early Covid-19 pandemic (2020)

― PCE consumption --- average 2015-19

― GDPNow estimates

3.1 -2.7 2.5

-20 -15 -10 -5 0 5 10 15 20

Jan-90 Jun-95 Dec-00 Jun-06 Nov-11 May-17 Nov-22

% YoY

― US leading indicator

― US coincident indicator

* shading = US recession on average, negative leading index

predicts recessions within ~6 months

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Source: Bloomberg

Chart 3. Weakening demand has lowered commodity prices but a strong USD might still be needed to suppress prices even more

Panel 3. Stress has risen in Treasury and FX markets while the US money market stays quiescent

0 1 2 3 4 5

Jan '02 Mar '06 May '10 Jul '14 Oct '18 Dec '22

VIX MOVE

CVIX

Volatility indices

Index (2002- 2021 avg)

0 100 200 300 400 500

Jan '02 Mar '07 Jun '12 Sep '17 Dec '22

TED LOIS

US money market spreads:

bps

-120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120

-30 -20 -10 0 10 20 30

Jan-71 Sep-79 May-88 Jan-97 Sep-05 May-14 Dec-22

 Dollar index

 S&P commodity price index

% YoY

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Selected Macroeconomic Indicator

Source: Bloomberg, BI, BPS Notes:

^Data for January 2022

*Data from earlier period

**For changes in currency: Black indicates appreciation against USD, Red otherwise

***For PMI, >50 indicates economic expansion, <50 otherwise Key Policy Rates Rate (%) Last

Change

Real Rate (%)

Trade &

Commodities 14-Dec -1 mth Chg (%)

US 4.00 Nov-22 -3.10 Baltic Dry Index 1,401.0 1,355.0 3.4

UK 3.00 Nov-22 -7.70 S&P GSCI Index 602.9 646.7 -6.8

EU 2.00 Nov-22 -8.00 Oil (Brent, $/brl) 82.7 96.0 -13.8

Japan -0.10 Jan-16 -3.80 Coal ($/MT) 363.2 291.5 24.6

China (lending) 4.35 Nov-22 2.75 Gas ($/MMBtu) 6.60 4.74 39.2

Korea 3.25 Nov-22 -1.75 Gold ($/oz.) 1,807.3 1,771.2 2.0

India 6.25 Dec-22 0.37 Copper ($/MT) 8,478.3 8,501.9 -0.3

Indonesia 5.25 Nov-22 -0.17 Nickel ($/MT) 28,143.0 26,856.0 4.8

CPO ($/MT) 885.3 902.3 -1.9

Rubber ($/kg) 1.37 1.27 7.9

SPN (1M) 3.39 5.19 -180.0

SUN (10Y) 6.86 7.04 -18.4

INDONIA (O/N, Rp) 4.84 4.31 52.9 Export ($ bn) 24.12 24.73 -2.5

JIBOR 1M (Rp) 5.95 5.45 50.0 Import ($ bn) 18.96 19.14 -0.9

Trade bal. ($ bn) 5.16 5.59 -7.8

Lending (WC) 8.42 8.42 -0.03

Deposit 1M 2.87 2.83 3.57

Savings 0.65 0.64 0.98

Currency/USD 14-Dec -1 mth Chg (%) Consumer confidence

index (CCI) 119.1 120.3 124.7

UK Pound 0.805 0.845 5.04

Euro 0.936 0.966 3.24

Japanese Yen 135.5 138.8 2.46

Chinese RMB 6.950 7.097 2.12

Indonesia Rupiah 15,598 15,494 -0.67 Capital Mkt 14-Dec -1 mth Chg (%)

JCI 6,801.7 7,089.2 -4.05 USA 49.0 50.2 -120

DJIA 33,966.4 33,747.9 0.65 Eurozone 47.1 46.4 70

FTSE 7,495.9 7,318.0 2.43 Japan 49.0 50.7 -170

Nikkei 225 28,156.2 28,263.6 -0.38 China 49.4 49.2 20

Hang Seng 19,673.5 17,325.7 13.55 Korea 49.0 48.2 80

Indonesia 50.3 51.8 -150

Stock 2,656.0 2,630.5 25.56

Govt. Bond 736.9 713.2 23.70

Corp. Bond 14.5 15.4 -0.86

Chg (bps) Oct

Nov Money Mkt Rates 14-Dec -1 mth Chg

(bps)

Bank Rates (Rp) Aug Jul Chg

(bps)

26.9 20.9 11.6

Nov Oct

Foreign portfolio

ownership (Rp Tn) Nov Oct Chg (Rp Tn)

External Sector

Prompt Indicators

Car sales (%YoY)

Manufacturing PMI Motorcycle sales (%YoY)

Central bank reserves ($ bn)*

4.2 23.3 16.4

Chg (%)

Oct Aug

Nov

134.0 130.2 2.92

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Indonesia – Economic Indicators Projection

** Estimation of Rupiah’s fundamental exchange rate

Economic, Banking & Industry Research Team David E.Sumual

Chief Economist

[email protected] +6221 2358 8000 Ext:1051352

Agus Salim Hardjodinoto Senior Industry Analyst [email protected]

+6221 2358 8000 Ext: 1005314

Barra Kukuh Mamia Senior Economist [email protected] +6221 2358 8000 Ext: 1053819 Victor George Petrus Matindas

Senior Economist

[email protected] +6221 2358 8000 Ext: 1058408

Gabriella Yolivia Industry Analyst

Suryaputra Wijaksana Economist / Analyst

[email protected] +6221 2358 8000 Ext: 1065752 Lazuardin Thariq Hamzah

Economist / Analyst

Keely Julia Hasim Economist / Analyst [email protected] +6221 2358 8000 Ext: 1071535

Elbert Timothy Lasiman Economist / Analyst [email protected] +6221 2358 8000 Ext: 1074310 Arief Darmawan

Research Assistant

Firman Yosep Tember Research Assistant [email protected] +6221 2358 8000 Ext: 20378

2017 2018 2019 2020 2021 2022E

Gross Domestic Product (% YoY) GDP per Capita (US$)

Consumer Price Index Inflation (% YoY) BI 7 day Repo Rate (%)

USD/IDR Exchange Rate (end of year)**

Trade Balance (US$ billion) Current Account Balance (% GDP)

5.1 3877

3.6 4.25 13,433

11.8 -1.6

5.2 3927

3.1 6.00 14,390

-8.5 -3.0

5.0 4175

2.7 5.00 13,866

-3.2 -2.7

-2.1 3912

1.7 3.75 14,050

21.7 -0.4

3.7 4350

1.9 3.50 14,262

35.3 0.3

5.3 4564

5.6 5.5 15,584

52.8 0.9

PT Bank Central Asia Tbk

Economic, Banking & Industry Research of BCA Group 20^th Grand Indonesia, Menara BCA

Jl. M.H Thamrin No. 1, Jakarta 10310, Indonesia Ph : (62-21) 2358-8000 Fax : (62-21) 2358-8343

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