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Morgan Stanley: BI Reference Interest Cuts 75 Bps

By administrator | March 17, 2019 | BI 7-Days Reverse Repo.
BI Reference Interest Cuts

Illustration: BI Reference Interest Cuts

Notable world investment bank Morgan Stanley (MS) has recently been released his research related to economic and investment strategy in Indonesia. In the research, titled “When Easing Risks Become Reality”, dated March 13, Morgan Stanley made a projection that is quite astounding. They estimate the Bank Indonesia (BI) cut its benchmark interest rate of 75 Bps in 3Q19.

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“We’re projecting BI trim (interest rate reference) 75 bps in 3Q19 along with the normalization delay by The Fed, low inflation, and CAD that narrows … ” wrote Morgan Stanley in his research. As information, Indonesia’s economy grew by 5.17% on last year, much lower than the target in the State Budget amounted to 5.4%. Hence, the drop in underlying interest rates will indeed be a fresh wind to the economy of Indonesia is been fell.

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However, could it be BI reference interest rates slashed up to 75 bps in just one quarter? Thus There Is A Chance The Fed Cut Benchmark Interest Rates. Normalization delay by The Federal Reserve as the central bank of the US being one reason Morgan Stanley in projecting the reference interest rate trimming by BI.

In fact, the expectations of market participants towards the direction of the reference interest rate policy The Fed can be calculated through the instrument price movements Fed Funds Futures. To quote the official website of CME Group which is the provider of the world’s leading derivatives exchanges, based on Fed Funds Futures contract price per 15 March 2019, there is absolutely no chance for The Fed to increase reference interest rates this year.

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Thus, it is likely that The Fed will cut its benchmark interest rate. The probability of the reference interest rate trimmed by 25 Bps this year are at the level of 22.9%. In fact, there is also the chance The Fed slashed benchmark interest rates of 50 Bps, although small i.e. amounted to 2.7%.

The biggest possible, The Fed would hold interest rates reference throughout this year. The probability of the reference interest rates remained in the range of 2.25%-2.5% at the end of the year was 74.2%. In making its decision, The Fed pays attention to two main indicators of inflation and the labor market. Talk about inflation, The Fed used the Personal Consumption Expenditures (PCE) price index as its size. Long term target for inflation is 2%.

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For the period December 2018, the PCE price index grew by 1.7% YoY or still under target for The Fed. By looking at this data, of course the normalization of interest rates of reference being difficult to do. Moreover, The Fed Governor Jerome Powell has repeatedly asserted that it would be more patient in doing normalization as a low and controlled inflation.

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Data related to labor, at last week’s job creation of non-agricultural sector February period was announced as many as 20,000 only, far below the consensus of which as many as 180,000, as reported by from Forex Factory. Job creation in the past month was the weakest since September 2017. By looking at the inflation and labor data, be unreasonable if we are projecting The Fed has yet to be hike its reference interest rate this year. Further, cutting by 25 Bps has also become reasonable.

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