1
• In a highly anticipated move, the Fed announced that it had raised the Fed Funds Rate by 25 bps to a range of 0.25%-0.5% after February’s FOMC meeting. More eventful perhaps, was the Fed’s dot plot, which shows that officials plan on hiking rates six more times to between 1.75% and 2% by the year’s end.
• The markets’ rather calm reaction points to the fact that the FOMC statement removes much of the uncertainty with regard to the Fed’s monetary tightening timeline. Although markets initially revised their expectations downward after Russia’s invasion of Ukraine, their expectations for 2022 are now quite in line with the Fed’s rate hike plan (Chart 1). Indeed, the VIX index (SPX volatility) remained relatively stable over the past few days, as did the MOVE index (UST volatility) and the CVIX index (global FX volatility), indicating reduced market turbulence. Although recent progress on a tentative peace plan between Ukraine and Russia is a breath of fresh air for the global economy, there are still several risks posed by the war unless a ceasefire is made in the near future.
• While the Fed has upwardly revised its 2022 PCE inflation projection to 4.3% from 2.6% in December, there is still a possibility that this projection may be too optimistic if the war continues. So while the Fed has decidedly become more hawkish, higher-than-expected inflation could mean that the Fed’s tightening timeline might still be behind of the “curve”
and the US may still have to go through a period of high prices.
• Even though the above risk appear to support the argument for an even more aggressive monetary tightening, the Fed remains constrained by the risks of overly fast tightening.
Indeed, the declining spread between the 10Y and 2Y US treasury yields point to the increasing likelihood of a US recession (Chart 2). There are also mounting fears that Russia
Executive Summary
The Fed announced that it had raised the Fed Funds Rate by 25 bps to a range of 0.25%- 0.5% after February’s FOMC meeting. Additionally, the Fed’s dot plot shows that officials plan on hiking rates six more times to between 1.75% and 2% by the year’s end.
While inflationary pressures from the Russo-Ukrainian conflict appear to be in favor of even more aggressive monetary tightening, the Fed is constrained by its inability to move too quickly without slowing down the economy significantly.
Indonesia’s healthy trade buffer provides room for BI to follow the Fed less closely, but rising domestic inflationary pressures remain.
Fed and BI Policy:
The Fed leaps, while BI watches and waits
17 March 2022
Keely Julia Hasim Economist/Analyst
Barra Kukuh Mamia Senior Economist
2
will default on its dollar-denominated debt, as sanctions imposed by the US and its allies mean that Russia is largely shut out of its dollar reserves, which could have a contagion effect on global markets. A slowing growth outlook would make it quite plausible for the Fed to slow its rate hike trajectory by the end of the year, and it is now quite probable that the Fed rate would not exceed inflation for a few years down the road – meaning that real rates would remain negative.
• In contrast to the Fed’s rate hikes, Bank Indonesia (BI) held its benchmark 7-Day Reverse Repo Rate at 3.50%, in line with market consensus. Despite maintaining its policy rate, BI has already started increasing its reserve requirement ratio (RRR) from 3.5% to 5% at the start of the month.
• BI’s decision to take its time to hike rates is justified considering that the Rupiah has remained relatively stable with the help of Indonesia’s trade surplus. But as mentioned in our previous report (“Trade: Exports soar, but limits remain”), perhaps a more pressing factor under BI’s consideration is the potential for a resurgence in domestic inflation due to rising commodities prices. Indeed, the government’s decision to remove price controls for simple and premium packaged cooking oil makes rising inflation unavoidable in the next few months. Similar price adjustments could happen for other goods as well if commodities prices remain elevated in the latter half of 2022, providing further impetus to prices.
• Overall, we maintain our view that BI does not need to follow the Fed’s interest rate decisions quite as closely as before, particularly due to Indonesia’s healthy trade surplus buffer that could help weather capital outflows from Indonesia as the Fed hikes interest rates. Indonesia might also be less vulnerable to foreign capital outflows now due to the fact that the proportion of foreign bond ownership is less than 20% compared to around 40% before the pandemic began. As such, BI will still have room to adjust interest rates more gradually, provided that inflation remains relatively under control.
“While inflationary pressures from the Russo-Ukrainian conflict appear to be in favor of even more aggressive monetary tightening, the Fed is constrained by its
inability to move too quickly without
slowing down the economy significantly.”
3
Chart 1. Markets’ expectations for 2022 are now quite in line with the Fed’s rate hike plan
Source: BPS, BCA Economist
Chart 2. The declining spread between the 10Y and 2Y US treasury yields point to the increasing likelihood of a US recession
Source: Bloomberg
1.83 2.59
2.31
0 0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.5
Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 Dec-2022
Dec-2023 Dec-2024
Source: Bloomberg (last update: 17 Mar 2022)
%
21.76 -50
0 50 100 150 200 250 300
bps 350
Spread between 10Y and 2Y UST
4
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 16-Mar -1 mth Chg (%)
US 0.25 Mar-20 -7.65 Baltic Dry Index 2,591.0 1,977.0 31.1
UK 0.50 Feb-22 -5.00 S&P GSCI Index 684.4 643.1 6.4
EU 0.00 Mar-16 -5.80 Oil (Brent, $/brl) 98.0 94.4 3.8
Japan -0.10 Jan-16 -0.60 Coal ($/MT) 235.9 166.2 42.0
China (lending) 4.35 Oct-15 3.45 Gas ($/MMBtu) 4.68 3.92 19.4
Korea 1.25 Jan-22 -2.45 Gold ($/oz.) 1,927.3 1,858.8 3.7
India 4.00 May-20 -2.07 Copper ($/MT) 10,056.0 9,894.3 1.6
Indonesia 3.50 Feb-21 1.44 Nickel ($/MT) 45,795.0 23,373.0 95.9
CPO ($/MT) 1,635.2 1,385.1 18.1
Rubber ($/kg) 1.69 1.76 -4.0
SPN (1M) 2.15 3.85 -170.4
SUN (10Y) 6.75 6.51 24.4
INDONIA (O/N, Rp) 2.78 2.79 -0.5 Export ($ bn) 20.46 19.17 6.7
JIBOR 1M (Rp) 3.55 3.55 0.0 Import ($ bn) 16.64 18.21 -8.6
Trade bal. ($ bn) 3.83 0.96
Lending (WC) 8.63 8.76 -13.02
Deposit 1M 2.92 3.02 -9.83
Savings 0.69 0.71 -2.65
Currency/USD 16-Mar -1 mth Chg (%) Consumer confidence
index (CCI) 113.1 119.6 118.3
UK Pound 0.761 0.737 -3.06
Euro 0.906 0.881 -2.78
Japanese Yen 118.7 115.4 -2.79
Chinese RMB 6.353 6.355 0.03
Indonesia Rupiah 14,312 14,353 0.29 Capital Mkt 16-Mar -1 mth Chg (%)
JCI 6,992.4 6,815.6 2.59
DJIA 34,063.1 34,738.1 -1.94
FTSE 7,291.7 7,661.0 -4.82 USA 58.6 57.6 100
Nikkei 225 25,762.0 27,696.1 -6.98 Eurozone 58.2 58.7 -50
Hang Seng 20,087.5 24,906.7 -19.35 Japan 52.7 55.4 -270
China 50.4 49.1 130
Korea 53.8 52.8 100
Stock 2,045.8 2,314.3 -268.45 Indonesia 51.2 53.7 -250
Govt. Bond 896.6 887.3 9.35
Corp. Bond 20.3 23.0 -2.67
#N/A 7.8 -0.9
Chg (bps) Jan
Feb Money Mkt Rates 16-Mar -1 mth Chg
(bps)
Bank Rates (Rp) Dec Nov Chg
(bps)
Foreign portfolio
ownership (Rp Tn) Feb Jan Chg (Rp Tn)
External Sector
Prompt Indicators
Car sales (%YoY)
Manufacturing PMI Cement sales (%YoY) Motorcycle sales (%YoY)
Central bank reserves ($ bn)*
-2.6 12.5 67.4
Feb Jan Chg
(%)
Jan Dec
Feb
141.4 141.3 0.04
65.1 58.9 68.1
5
Indonesia – Economic Indicators Projection** Estimation of Rupiah’s fundamental exchange rate
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
5.2 4640
3.7 4.0 14,660
35.7 0.5
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
[email protected] +6221 2358 8000 Ext: 1063933
Derrick Gozal Economist / Analyst [email protected] +6221 2358 8000 Ext: 1066122 Livia Angelica Thamsir
Economist / Analyst [email protected] +6221 2358 8000 Ext: 1069933
Lazuardin Thariq Hamzah Economist / Analyst
[email protected] +6221 2358 8000 Ext: -
Keely Julia Hasim Economist / Analyst [email protected] +6221 2358 8000 Ext: - Ahmad Aprilian Rizki
Research Assistant [email protected] +6221 2358 8000 Ext: 20378
Arief Darmawan Research Assistant
[email protected] +6221 2358 8000 Ext: 20364
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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