1
The latest FOMC meeting delivered yet another 25 bps hike to the Fed Funds Rate, bringing the range up to 5% - 5.25%. The Fed also seemed to tone down its language on further rate hikes in its post-meeting statement, as it eliminated the reference to “additional policy firming”. Despite this, the Fed’s statements did not indicate any rate cuts in the near-term, with Powell stating that the rate-setting committee has “a view that inflation is going to come down not so quickly”. While the Fed’s stance was not as dovish as originally hoped, it appears that it was not too far off from market expectations, and the negative market reaction was rather limited.
Given that the Fed is still reluctant to cut rates due to inflation, it raises the question of whether there are any factors in the coming months that could lead to a faster-than-expected decline in prices. One possibility is the global slowdown, which could further reduce demand and prices for the US' major imports, thus accelerating the disinflation process. Additionally, China's economic reopening appear to be unable to counteract the US and Europe’s economic slowdown, given that the impact of the reopening has been less impressive than anticipated – mostly serving as an outlet to reduce China’s excess inventory.
Another factor that could contribute to a faster decline in inflation is stricter lending standards following the US banking crisis, leading to a slowdown in lending and potentially causing a credit crunch in the US. The recent banking stresses – which have most severely affected small to mid-sized banks – is a natural consequence of a tighter liquidity environment (banks are forced to sell securities when third-party funds decline). Declining credit growth makes further slowdown later in the year look all the more likely, but it could also help reduce monetary inflation. Additionally, a decrease in demand for goods and services resulting from
Executive Summary
The Fed increased the Fed Funds Rate by 25 bps, bringing the range up to 5% - 5.25%. The Fed toned down its language on further rate hikes in its post-meeting statement, but it also did not indicate any rate cuts in the near-term.
There are a number of factors that could lead to a faster-than-expected decline in US inflation, including the global economic slowdown and stricter lending standards in the aftermath of the US banking crisis.
However, there is still a high level of uncertainty with regard to US inflation, which makes the Fed more cautious before deciding to pivot. Until the Fed cuts rates, BI will mostly be limited to tweaking its macroprudential policies to facilitate domestic growth.
FOMC:
No cuts until clearer signals
04 May 2023
Keely Julia Hasim Economist/Analyst
Barra Kukuh Mamia Senior Economist
2
slowing economic growth and higher unemployment could further contribute to reducing inflation.
But despite the abovementioned factors, there are still lots of unknowns that could affect US inflation going forward. The Fed’s current stance then, should not be interpreted as stubbornness, but rather as a pragmatic response to the high level of uncertainty in the economy. There are several potential scenarios that could play out, from stubborn inflation amid geopolitical flareups to the possibility of a “hard landing” that could result in a rapid deflationary environment. Given this uncertainty, the Fed is taking a cautious, “wait-and-see”
approach before deciding to pivot, which would likely not happen until Q3-2023 or later.
Even though the Fed has not pivoted, Indonesia is already quite secure, considering that the Rupiah is still one of the best performing currencies among its peers. Since BI is under no pressure to tighten any further amid rapidly declining inflation, the question then transitions to when BI would start easing policy if it is needed to bolster growth. But as we mentioned previously, the possibility of BI cutting rates before the Fed is still limited – although reserve requirement ratios could provide an alternate avenue to ease policy. Until the Fed cuts rates, BI will mostly be limited to tweaking its macroprudential policies to facilitate domestic growth.
3
Source: Bloomberg, BI
Source: US BLS, Bloomberg
% YoY
Panel 1. The market still expects the Fed to pivot in the latter half of the year, with the FFR futures sloping down more steeply in May-2023 (post FOMC) compared to Apr-2023
%
Panel 2. Inflation expectations remain stubbornly high due to some sticky components
4.61
3.84 3.57
3.35 3.37
6.26 6.39
5.99
6.11 6.12 6.15
6.41
3 3.5 4 4.5 5 5.5 6 6.5 7
0 2 4 6 8 10
US yield curve Indonesia yield curve
%
3.29 3.11 2.92
2.50 3.00 3.50 4.00 4.50 5.00 5.50
Jan-23 Jun-23 Dec-23 Jun-24 Dec-24
End of Mar-23 End of Apr-23 May-23 (post-FOMC)
FFR Futures, per:
2.2 2.5
-1 0 1 2 3 4
Jan-05 Apr-06 Aug-07 Nov-08 Mar-10 Jul-11 Oct-12 Feb-14 Jun-15 Sep-16 Jan-18 May-19 Aug-20 Dec-21 Apr-23
% YoY
Expected US inflation:
― Breakeven (Tsy-TIPS 5Y)
― Swap 5Y/5Y
0 2 4 6 8 10
Jan-21 Jul-21 Jan-22 Jul-22 Feb-23
Services less energy services Core goods
Energy Food CPI (YoY)
%
4.98
4
Source: Bloomberg
Source: Atlanta Fed
Panel 3. A hard-landing scenario appear to be more likely following the US banking crisis
Panel 4. GDP nowcast points to slowing demand amidst relatively strong GDP print
-7.8 1.8
-20 -15 -10 -5 0 5 10 15 20
Jan-90 Oct-92 Jul-95 Apr-98 Jan-01 Nov-03 Aug-06 May-09 Feb-12 Nov-14 Sep-17 Jun-20 Mar-23
― US leading indicator
― US coincident indicator
* shading = US recession on average, negative leading index
predicts recessions within ~6 months
% YoY
-2 0 2 4 6 8 10
Jan-15 Sep-16 May-18 Jan-20 Sep-21 May-23
anomaly during early Covid-19 pandemic (2020)
― PCE consumption --- average 2015-19
― GDPNow estimates
2.8 2.4
1.3
1.8
5
Source: Bloomberg
Source: Bloomberg
Panel 5. While the Fed’s stance was not as dovish as originally hoped, negative market reaction was rather limited.
Panel 6. Stress has risen in Treasury and FX markets while the US money market stays quiescent
Dollar index
S&P commodity price index
-120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120
-30 -20 -10 0 10 20 30
Jan-71 Nov-76 Aug-82 Jun-88 Mar-94 Jan-00 Oct-05 Aug-11 May-17 Mar-23
Dollar index
S&P commodity price index
% YoY
% YoY
0 1 2 3 4 5
Jan-02 Apr-06 Jul-10 Oct-14 Jan-19 Apr-23 VIX Index
MOVE Index CVIX Index
Volatility indices Index (2002-
2021 avg)
0 100 200 300 400 500
Jan-02 Apr-06 Jul-10 Oct-14 Jan-19 Apr-23 TED
LOIS
US money market spreads:
bps
6
Selected Macroeconomic IndicatorSource: 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 3-May -1 mth Chg (%)
US 5.25 May-23 0.25 Baltic Dry Index 1,558.0 1,389.0 12.2
UK 4.25 May-23 -5.85 S&P GSCI Index 532.1 574.0 -7.3
EU 3.50 May-23 -3.50 Oil (Brent, $/brl) 72.3 79.8 -9.3
Japan -0.10 Jan-16 -3.30 Coal ($/MT) 182.3 205.7 -11.4
China (lending) 4.35 May-23 3.65 Gas ($/MMBtu) 2.01 2.10 -4.3
Korea 3.50 Apr-23 -0.20 Gold ($/oz.) 2,039.0 1,969.3 3.5
India 6.50 Apr-23 0.84 Copper ($/MT) 8,442.8 9,003.5 -6.2
Indonesia 5.75 Apr-23 1.42 Nickel ($/MT) 24,689.0 23,651.0 4.4
CPO ($/MT) 915.9 938.7 -2.4
Rubber ($/kg) 1.33 1.34 -0.7
SPN (1M) 3.83 4.44 -61.1
SUN (10Y) 6.46 6.77 -31.3
INDONIA (O/N, Rp) 5.61 5.62 -0.7 Export ($ bn) 23.50 21.38 9.89
JIBOR 1M (Rp) 6.40 6.40 0.0 Import ($ bn) 20.59 15.92 29.33
Trade bal. ($ bn) 2.91 5.46 -46.78
Lending (WC) 8.89 8.75 13.80
Deposit 1M 4.18 4.00 17.94
Savings 0.67 0.67 0.25
Currency/USD 3-May -1 mth Chg (%) Consumer confidence
index (CCI) 123.3 122.4 119.9
UK Pound 0.796 0.811 1.84
Euro 0.904 0.923 2.06
Japanese Yen 134.7 132.9 -1.37
Chinese RMB 6.913 6.874 -0.56
Indonesia Rupiah 14,685 14,995 2.11 Capital Mkt 3-May -1 mth Chg (%)
JCI 6,812.7 6,805.3 0.11 USA 47.1 46.3 80
DJIA 33,414.2 33,274.2 0.42 Eurozone 45.8 47.3 -150
FTSE 7,788.4 7,631.7 2.05 Japan 49.5 49.2 30
Nikkei 225 29,158.0 28,041.5 3.98 China 49.5 50.0 -50
Hang Seng 19,699.2 20,400.1 -3.44 Korea 48.1 47.6 50
Indonesia 52.7 51.9 80
Stock 2,789.1 2,726.8 62.33
Govt. Bond 822.9 818.5 4.38
Corp. Bond 11.8 12.0 -0.20
Chg (bps) Mar
Apr Money Mkt Rates 3-May -1 mth Chg
(bps)
Bank Rates (Rp) Feb Jan Chg
(bps)
40.5 56.3 24.6
Mar Feb
Foreign portfolio
ownership (Rp Tn) Apr Mar Chg (Rp Tn)
External Sector
Prompt Indicators
Car sales (%YoY)
Manufacturing PMI Motorcycle sales (%YoY)
Central bank reserves ($ bn)*
2.6 7.4 9.0
Chg (%)
Feb Dec
Mar
145.2 140.3 3.48
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7
Indonesia – Economic Indicators Projection*Estimated number
** Estimation of Rupiah’s fundamental exchange rate
Economic, Banking & Industry Research Team David E.Sumual
Chief Economist
david_sumual@bca.co.id +6221 2358 8000 Ext:1051352
Agus Salim Hardjodinoto
Head of Industry and Regional Research agus_lim@bca.co.id
+6221 2358 8000 Ext: 1005314
Barra Kukuh Mamia Senior Economist barra_mamia@bca.co.id +6221 2358 8000 Ext: 1053819 Victor George Petrus Matindas
Senior Economist
victor_matindas@bca.co.id +6221 2358 8000 Ext: 1058408
Gabriella Yolivia Industry Analyst
gabriella_yolivia@bca.co.id +6221 2358 8000 Ext: 1063933
Lazuardin Thariq Hamzah Economist / Analyst
lazuardin_hamzah@bca.co.id +6221 2358 8000 Ext: 1071724 Keely Julia Hasim
Economist / Analyst keely_hasim@bca.co.id +6221 2358 8000 Ext: 1071535
Elbert Timothy Lasiman Economist / Analyst Elbert_lasiman@bca.co.id +6221 2358 8000 Ext: 1074310
Thierris Nora Kusuma Economist / Analyst thierris_kusuma@bca.co.id +6221 2358 8000 Ext: 1071930 Arief Darmawan
Research Assistant
arief_darmawan@bca.co.id +6221 2358 8000 Ext: 20364
Firman Yosep Tember Research Assistant firman_tember@bca.co.id +6221 2358 8000 Ext: 20378
s
2018 2019 2020 2021 2022 2023E
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)
5.2 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 4784
5.5 5.50 15,568
54.5 1.0
4.9 5011
3.4 5.75 15,173
28.4 -1.02
PT Bank Central Asia Tbk
Economic, Banking & Industry Research of BCA Group 20th 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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