BI likely to lower policy rate by 25bp to support growth amid increasingly fragile global economy, says Scotiabank

Bank Indonesia is expected to lower its benchmark policy rate by 25bp to 5.00 percent at its upcoming monetary policy meeting on next Thursday afternoon to support growth amid an increasingly fragile global economy, with scope provided by the Fed’s dovish stance, according to the latest research report from Scotiabank.

In addition, Indonesia’s CPI inflation eased to 3.39 percent y/y in September from 3.49 percent the previous month, lower than market estimate of 3.52 percent. BI Deputy Governor Dody Budi Waluyo said in a Bloomberg interview on the side-lines of IMF meetings last Thursday that the central bank has room to cut interest rates further, perhaps as soon as October.

He added that risks coming from the domestic will not destroy the BI’s inflation target. Indonesian President Joko Widodo was officially sworn into office for his second and final five-year term on Sunday.

He outlined his key priorities in the next five years, including raising the quality of human resources, building more infrastructure and reducing bureaucracy.

President Jokowi’s bold reform agenda is expected to be supportive of the IDR in the medium to long-term. The IDR has been running a tight correlation with the 10-year Indonesia government bond yield, remaining vulnerable to capital flight as portfolio investment inflows play a substantial role in financing the nation’s current account deficit and can be withdrawn at a short notice, the report added.

According to the BI data, about 38.8 percent of total outstanding Indonesia government bonds are owned by foreign investors. The New York Fed bought USD7.501 billion of T-bills last Wednesday (October 16), the first operation under the US central bank’s renewed asset purchase programme.

Earlier on October 11, the Fed announced that it will buy Treasury bills (T-bills) beginning October 15 at an initial pace of USD60 billion a month and continue those purchases into the second quarter of 2020.

It will improve dollar liquidity in the US money markets and ease market concerns. Implied vols of USD/IDR have been falling since late August, largely due to a steady yuan exchange rate and easing US-China trade tensions.

The move is expected to prompt foreign investors to pour more funds into Indonesian equity and bond markets for higher returns. After all, the global stock of negative-yielding debt is now about USD13.2 trillion.

"We would like to sell USD/IDR with a target of 13,900 and a stop of 14,300, while keeping a close watch on the US-China trade talks and the month-end dollar demand of local importers," Scotiabank further commented in the report.