JAKARTA: While greater emphasis should be placed on the transmission of monetary policy after Bank Indonesia cut interest rates by 125 bps since the start of the year, there is admittedly room for a further rate cut and this is likely to be sooner rather than later given expectation for the US Fed to hike in Dec, said UOB. The research firm adds that the success of the tax amnesty program and IDR strength could allow room for a further 25 bps cut in the interest rate in 4Q16.
The first phase of the tax amnesty program which offered the lowest redemption rate of 2-4% ended on 30 Sep. The surge in declarations ahead of the deadline brought the tax amnesty collection to Rp97.2 tn (US$7.5bn) or 58.9% of the government’s target for the whole program (as of the official website data this morning). Beyond the positive headline numbers, we noted that only around 30% of the declared assets were overseas and only 13% of this declared overseas wealth was repatriated. Still, repatriated assets which amounted to Rp137tn (US$10.5 bn) is equivalent to 9.3% of Indonesia’s FX reserves.
In the second phase of the program from Oct-Dec 2016, the redemption rate for declared and repatriated assets will rise to 3% and 6% for assets which are not repatriated.
Data today, meanwhile, showed that the headline inflation has remained benign in Sep, coming in within consensus expectation at 3.07% y/y from more than six year low of 2.79% in Aug. We expect headline inflation to rebound towards 3.5% at the end of the year and continue to edge higher in 2017. This is still low compared to inflation rates in the past three years.
In addition, core inflation has fallen further to 3.21% y/y in Sep from 3.32% in Aug. With the announced budget cuts expected to weigh on the growth outlook in 2H16 and weak inflationary pressure in the short-term, another 25 bps interest rate cut cannot be ruled out.
