Upside risk to Bank of Indonesia's rate expectations

Consensus expects BI to cut its benchmark interest rates by 50bps to 7% in 2016. However, BI Governor Martowardojo was explicit in August in saying BI expects the benchmark rate at 7.5% for next year, that IDR was undervalued and a joint policy effort from both BI and the government was required to stabilize the economy and the IDR.

There is upside risk to market expectations of further BI easing since CPI Inflation remains well above target. In addition, foreign investors' share of outstanding Indonesian government bonds increased to a record 39.6% in June, one of the highest shares in the region and real interest rates are barely positive. 

"BI must remain vigilant against inflation and a renewed widening of the current account deficit. While BI cut its forecast for 2016 economic growth to 5.2-5.6% from 5.3-5.7% previously, this is not significant enough to alter the views on BI rates", says RBC capital markets.