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Bank Indonesia likely to leave policy rate unchanged this week; prospects of rate cuts remain high

Bank Indonesia (BI) is expected to leave its policy rate unchanged at 6.00 percent at its monetary policy meeting on Thursday afternoon, but see rising odds of future monetary easing as Indonesia’s central bank chief and finance minister have discussed prospects for rate cuts, according to the latest research report from Scotiabank.

BI Governor Perry Warjiyo told lawmakers in Jakarta on Monday that the Indonesian central bank sees room to cut its key policy rate, but needs to monitor global financial market conditions and the country’s balance of payments.

Earlier, Indonesia’s Finance Minister Sri Mulyani Indrawati said last Wednesday that the BI will likely join other central banks in easing monetary policy to counter a global economic slowdown. It will provide scope for the BI to deliver rate cuts later if the Fed sounds dovish at the June FOMC meeting or cut fed funds rate in July.

In addition, the confirmation of the Trump-Xi meeting at the G-20 Osaka Summit set for June 28-29 has improved market sentiment, clearing the way for the BI to lower its policy rate without risking a rupiah slump.

The IDR has been running a tight correlation with the 10-year Indonesian government bond yield and remains vulnerable to capital flight as portfolio investment inflows play a substantial role in financing Indonesia’s current account deficit and can be withdrawn at a short notice, the report added.

According to Bloomberg data, foreign investors are now holding about 38 percent of total outstanding Indonesian government bonds. When external uncertainties fade and disappear, the BI shifting to an easing bias will lower Indonesian government bond yields together with the sovereign credit rating upgrade, which is expected to attract bond portfolio inflows and prop up the IDR.

"We would like to sell USD/IDR now with a target of 14,000 given the latest developments in the US-China trade talks. We expect US President Donald Trump and Chinese President Xi Jinping to agree to resuming trade negotiations in the third quarter when the two leaders meet in Osaka late June," Scotiabank further commented in the report.

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July 2 15:00 UTC Released

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