On Tuesday (17/02), Bank Indonesia surprized markets by lowering its BI rate and deposit facility rate (Fasbi) by 25 basis points to 7.50 percent and 5.50 percent, respectively (the lending facility rate remained unchanged at 8.00 percent), citing easing inflation (which eased to 6.96 percent year-on-year in January 2015 from 8.36 percent y/y in the previous month). A lower interest rate environment (lower borrowing costs) should boost economic growth, which has slowed to a five-year low of 5.02 percent in 2014, in Southeast Asia’s largest economy. After the BI rate cut interest rate sensitive stocks (which include Indonesia’s financial institutions, construction firms and property companies) posted impressive gains. Indonesian banks now plan to cut mortgage interest rates hence easing the burden on Indonesia’s mortgage debtors. Based on data from Bank Indonesia, mortgages account for approximately 72 percent of new house purchases in Indonesia.

Read analysis Bank Indonesia Lowers Key Interest Rate in Surprise Move

Another reason why Bank Indonesia felt the possibility to lower its interest rate environment was because Indonesia’s current-account deficit (the broadest measure of a country’s trade in goods and services) narrowed to USD $6.2 billion, equivalent to 2.81 percent of gross domestic product (GDP) in the quarter of 2014 from a revised 2.99 percent in the previous quarter, particularly on the positive influence of low global oil prices (Indonesia is a net oil importer), while Indonesia’s non-oil & gas exports improved. A current account deficit signals that a country consumes more than it produces and therefore has to rely on foreign inflows in the form of investment and debt to finance the gap. For investors a wide current account deficit is a concern hence severe capital outflows occur in times of (global) economic shocks as investors pull capital out of lucrative (yet riskier) emerging market assets.

As a lower interest rate environment implies that people’s purchasing power improves, investors speculate that Indonesian companies’ corporate earnings will be solid in 2015 thus helping to push the Jakarta Composite Index to new highs. The index climbed 0.18 percent to 5,400.10 points on Friday (20/02).

Indonesia's Benchmark Jakarta Composite Index:

Around 5.4 billion shares, valued at IDR 5.2 trillion (USD $405 million), were traded on the Indonesia Stock Exchange on Friday with foreign investors making up 32 percent of total trading activity (recording net buying worth IDR 886 billion). Since the start of the year, foreign investors’ net buying has accumulated to a total of IDR 7.4 trillion (roughly USD $578 million).

Jahanzeb Naseer, Head of Research at Credit Suisse Securities Indonesia, said that the Jakarta Composite Index may climb up to 20 percent this year (to above 6,000 points) due to companies’ improved corporate earnings. He mentioned that telecommunication companies are expected to perform well on higher domestic smartphone usage, while automotive and property firms will also grow on higher consumer demand for transportation and housing (amid the country’s less tight interest rate environment).

Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.35 percent to IDR 12,849 per US dollar on Friday 20/02).

Indonesian Rupiah versus US Dollar:

| Source: Bank Indonesia