08:59 AM EST, 11/21/2024 (MT Newswires) -- Societe Generale said its expectation of a second rate cut by Bank Indonesia hit the external stability wall as the currency (IDR) failed to arrest the depreciation pressure even after the second rate cut by the United States Federal Reserve, which totaled a cumulative 75bps as against BI's 25bps cut till date.

BI Wednesday held its seven-day reverse repo rate at 6.00%, the facility deposit rate at 5.25%, and the lending facility rate at 6.75%.

Importantly, it appeared to be a hawkish pause by BI, given the clear view that currency stability will continue to be the prime driver of monetary policy decisions even if the less-than-robust economy fails to generate tailwinds that can propel real gross domestic product growth beyond 5.0% and inch toward the new President Praboyo Subianto's stated objective of achieving 8.0% growth, wrote the bank in a note to clients.

In the October policy meeting, BI was less hawkish, stating, that the short-term focus of monetary policy is on exchange rate stability. Now that the central bank has mentioned that currency stability would be their prime driver, what this suggests is that BI believes that the depreciation pressure on the currency is no longer short-term but that there are multiple factors that could potentially ensure the persistence of this pressure and so the monetary policy needs to be tuned to the evolving scenario, stated SocGen.

Interestingly, BI seems to be concerned that expansionary monetary policy remains the prime cause. This is despite the fact that the budget deficit remains well below the legal limit of 3.0% of GDP and even if it inches up, it's still expected to remain below the limit.

With BI no longer in a position to further monetize public debt as it did in the early period of the pandemic, debt servicing remains a major concern, especially when international investors are yet to show any signs of warming up to INDOGBs after having left the shores in drove, added the bank.

As a consequence, while President Subianto did call for ushering in of expansionary fiscal policy to raise growth potential, the limit to expansionary policy has been set. The continuation of Finance Minister Sri Mulyani, who is a fiscal hawk, clearly suggests that fiscal expansion is a no-go and that the deficit can rise by a mere 25bps at the most from the recent low levels.

What this means is that BI is comfortable with a growth rate of 5.0% or thereabouts, thereby clearly setting the parameters of its monetary policy decision-making.

With SocGen expecting another 25bps rate cut by the Federal Reserve during its December meeting, the bank believes that BI would also announce a rate cut in December, which will mean that by the time the year 2024 ends, BI will have cut the policy rate by a cumulative 50bpa as against the Fed's 100bps.

For 2025, SocGen is still maintaining its view of one rate cut -- 25bps each --per quarter by BI though by now it appears iffy. All eyes of BI would be on how the US economic policies would evolve under President-elect Donald Trump and its eventual impact on emerging market currencies.

If the rising depreciation pressure doesn't ease adequately, BI will do much less than what SocGen is currently expecting.