The FED preffered inflation inflation gauge, known as the personal consumption index, or PCE in February, was in line with market estimates as it came in at 2.5% year on year, nearing the FED's inflation target of 2%. The urcertainty surrounding the FED's timeline for the rate cuts has stirred some ambiguity in the markets. However. the anticipation of those cuts has also led to some bullish runs. Watch our discussions with Bank Mandiri Chief Economist, Mr. Andry Asmoro, to dive deeper into the FED's potentiall rate cuts and market reactions.
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00:00 I will come back to see today business. The Feds prefer to inflation gorge known as the
00:07 personal consumption index or PCE in February was in line with market estimates as it came
00:13 in at 2.5 percent year on year nearing the Fed's inflation target of 2 percent. Nonetheless
00:21 the Fed still remains cautious of the central bank's chairman Jerome Powell said last Friday
00:26 that they will still need to see more data that inflation is sustainably dropping to
00:32 their 2 percent target. However this uncertainty regarding the Fed's rate cuts has seen capital
00:39 outflow from Indonesia based on data from Bank Indonesia from March 25th to 27th 2024
00:48 non-residents in the domestic financial market recorded a net sale of 1.36 trillion rupiah
00:55 non-residents bought 0.79 I repeat that 0.97 billion rupiah in the bonds market but sold a
01:02 net of 1.59 trillion rupiah in the stock market and 0.74 trillion rupiah in the Indonesian
01:09 rupiah securities or SRDI. We don't see it as likely to be appropriate that we would begin to
01:20 reduce interest rates until the committee the federal open market committee is confident that
01:27 inflation is moving down to 2 percent on a sustained basis and what do we need to get
01:32 that confidence it's just more good inflation readings like the ones we were getting last year.
01:36 The uncertainty surrounding the Fed's timeline for the rate cuts has stirred some ambiguity
01:42 in the markets however the anticipation of those cuts has also led to some bullish runs
01:48 and to dive deeper into the Fed's potential rate cuts and market reactions. Joining me now in the
01:53 Bank Mandiri is Bank Mandiri's chief economist Mr. Andri Asmoro. Hi thank you for coming.
01:59 Thank you for inviting me. Yeah of course it's a pleasure as well. Yes. So Mr. Andri Asmoro how do
02:05 you assess the stance of the federal research on this interest rate cut if we see the U.S.
02:12 condition in its economy and indicators as well as we saw the PCE that was just recently released.
02:17 Yeah I think it is very interesting that the market now is very cautious on the timing of
02:25 the rate cut actually regarding to what the U.S. economy right now the data is getting stronger or
02:32 you know there are there are no major changes in in the pace of economic data in the U.S.
02:40 So I put some keywords from your explanation before that the market is very cautious on what's
02:48 the future data of the U.S. for example growth and also the job opportunity for the U.S.
02:57 So of course the Fed will assess what's the future inflation trajectory going forward. Yeah if there
03:05 are no significant changes for example or down what trend of the U.S. inflation we are going
03:13 forward to towards the 2 percent I believe market will assess that the timing of the rate cut will
03:19 be much longer than what they have already or previously expected. The market previously
03:25 expected that the Fed will cut in March actually but the Fed as we already know that the Fed holds
03:32 the benchmark and now the biggest changes in Korea according to market is that the Fed will cut
03:38 the benchmark rate in June actually. So once again like what Jerome Powell mentioned
03:46 yeah in their press conference that it always be depend on the data. Yeah it always depend
03:54 on the data whether the U.S. economic data is getting for example stronger or getting weaker
04:00 for example it will affect on the U.S. inflation trajectory going forward. Right so it's at the
04:05 same time they want to have inflation rate going down but they want to as well hold and wait and
04:11 see as well. Yeah. So Fed themselves have their dot plots of three times of interest rate cuts
04:18 but the U.S. inflation is proving to be quite sticky. Yeah. Stickier inflation. It was previously
04:24 on a downward trend. So what is actually the U.S. inflation as well as economies condition right now?
04:31 The U.S. economy is relatively mixed actually. They're posted with a mixed figure. If we take
04:37 look on the for example from the manufacturing data their manufacturing index right now is
04:43 actually exceeding level of 50 means that their manufacturing index now in the acceleration
04:50 territory. So it's at the highest in the last I think 12 months. So it reflects that the U.S.
04:57 economy is getting stronger if we take a look on the manufacturing side. But coming from the
05:01 retail and individual for example there are also weaker data from the U.S. Yeah. So this this mixed
05:09 data quite giving a constant for the market right now. Whether the Fed will still stick on you know
05:16 their plan for example to to to have like a three rate cut this year for example or only two or even
05:23 even more. For example. So that's actually becoming the major concern why the U.S. dollar for example
05:30 right now is relatively getting stronger compared to the all major currency and also emerging
05:37 markets currency right now. Right. So the the big key I think whether the inflation subdue very fast
05:46 to their target towards their target to 2 percent or no. In my view I think it's very difficult that
05:53 the inflation in the U.S. inflation rate to reach 2 percent. I think by the second half they will be
05:58 nearing to 2 percent not that is not 2 percent only I think to 2.5 percent. Okay. Now now we see
06:07 the geopolitical factors going on the war in Palestine. So do you think these factors will
06:14 affect the inflation or is there any other external factors that are at play before the Fed actually.
06:22 Yeah sure. There are three factors that affect the global economic situation including U.S. right now.
06:28 Number one of course the geopolitical factors. The geopolitical factors will affect on the
06:33 on the global logistic costs the global energy and also food prices. And last but not least of
06:41 course the outlook of the global economic growth of course. So there will be any or many pressures
06:48 coming to the U.S. and also emerging market for the U.S. for example the rising oil and also food
06:54 prices will also affect to their inflation inflationary outlook in domestic for example.
07:01 So what we had in or what we saw in 2022 for example when the Russia attacked Ukraine for
07:07 example at that time and the fuel price domestic their domestic fuel prices was increasing quite
07:14 significant and that makes their inflation domestic inflation it was increasing quite
07:18 significant. So it can be happening again this year because of the effect of the geopolitical
07:26 situation right now. It might expand actually. Exactly. So for example if the the the Middle East
07:32 tension is getting you know worse it will affect on that that logistic and also the fuel price.
07:40 Yeah. So you mentioned about there are possibilities that the rate cuts might only happen once or even
07:46 none at all. What factors do we look out for that could lead to this. I think the one and only
07:52 factors that will affect on the weather the Fed will cut three two or no rate cut for example this
07:58 year is their inflation that inflation inflation the future inflation that I owe for the U.S.
08:08 whether it will be persistently in the downtrend or no. Yeah. Closing to 2 percent or no. If for
08:16 example inflation stubbornly stay at two point eight point nine percent for example in the medium
08:24 of the of this year for example in the mid this year it will be very difficult for example the
08:29 Fed to cut rate as aggressive as this year. The good thing from the Fed from March meeting is that
08:36 they don't change or they didn't change the trajectory or the guidance means that they still
08:41 keep three times three times cut rate. Yeah. And also not the three time cut rate in 2025 and another
08:49 four rate cuts in 2026. So it should be good for emerging market. But right now in the short term
08:56 the market still wants some and puzzling whether they will cut in the in as fast as they can or
09:05 they delay a lot of uncertainty. OK. So with this condition with the uncertainties as we mentioned
09:13 regarding the first rate decision how do we see it impacting Rupiah and the Indonesian financial
09:18 markets. Yeah. Of course before we talk about what's the effect to Rupiah and also the bonds market
09:24 the immediate effect is on the capital outflows like you mentioned before. So there are
09:30 pressure from the capital outflows in bonds market especially. There were already capital outflow
09:40 around 33 trillion from the bonds market but from the equities actually capital inflows. So most of
09:46 the bonds investors now concerned about the outlook of the stability of emerging markets
09:54 impact from the depreciation of their currency for example to their bond market. And other than that
09:59 I think from the capital outflow it will affect two things to Rupiah depreciation and also to
10:07 the rising of the bonds domestic bond yield. Yeah. Yeah. I mean to talk about this more we saw
10:12 even since yesterday and today Rupiah already touched a very low. Yeah. Close to 16. Exactly
10:19 close to 16000 per dollar. So do you think this will impact a lot on Indonesian Rupiah for the
10:24 long run on the rate cuts. Yeah. In my view yeah I think we have to keep what's the end or the
10:33 directory or the target of the Fed Fund rate. Yeah. If the Fed still insists or persists to
10:39 hold their target of three times cut rate. Yeah. For example this year I think there is a possibility.
10:45 Yeah. If it is already touching above 16000 it will be stronger again or weaker US dollars
10:52 in the second half. So back to below 16000. So it's only temporary in my view. Yeah. Because
10:58 last like last year for example Rupiah is also approaching 16000. And now we already see that
11:04 Rupiah was closing at 15000 below 16400 at that time. So if the Fed I think we can we can yeah
11:13 we can optimize and the opportunity of the rate cut in the second half 2024. Yeah. The chief of
11:21 benefit for Rupiah. Right. The chief of Bank Indonesia Periwara you already saw this as well
11:26 on the rate cuts for this year. So how do you think Bank Indonesia will react then. Is it going
11:33 to be wait and see as well or to take immediate action. So Bank Indonesia of course they will do
11:38 the intervention through three channels from the for example from the open market operation
11:43 including the DDIF and also through the interest rate. Yeah. Three channels to intervene to
11:49 stability Rupiah stability for example. And one one big thing that the Bank Indonesia
11:56 do is does actually that Bank Indonesia will assure the liquidity of the US dollars in domestic
12:03 because right now the pressure of Rupiah is not coming from the stronger US dollars because of
12:10 that sentiment but also from the domestic side it is an increasing trend of demand for US dollar
12:17 because of the dividend payment season right now in the first quarter and also the debt payment
12:23 season right now. So there are many factors that affect of the of the Rupiah depreciation right now.
12:31 So Bank Indonesia will assure that the US dollar that liquidity in the domestic market for example
12:37 will be relatively manageable right now so that there will be any more pressure on that. And you
12:43 see that there is a potential for Indonesian Rupiah to have gain towards this rate cut. Yeah.
12:49 Of course if there is a rate cut in the global or the FED yeah of course it will be give benefit
12:56 for Rupiah. All right. Yeah. Sir Andrius Molo thank you so much for being here and see today
12:59 business. Thank you. Thank you. All right we're going for a break when we return we'll have the
13:04 latest update from the Indonesian stock market so stay tuned here.
13:09 Thank you.