BI likely to maintain policy rate at 5 pct on Jan 23, remain open to future rate cuts: Scotiabank

The Bank Indonesia (BI) is expected to maintain its policy rate at 5 percent at its monetary policy meeting on January 23, but with the door remaining open to future rate cuts amid Indonesia’s benign inflation outlook, according to the latest research report from Scotiabank.

The BI’s accommodative stance could prompt foreign investors to pour more funds into the nation’s bond markets on top of their net purchase of USD1.44 billion worth of local government bonds on January 1-14.

As known, the IDR has been running a tight correlation with the 10Y Indonesia government bond yield, while 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as portfolio investment inflows play a substantial role in financing the nation’s current account deficit and can be withdrawn at a short notice.

Indonesia’s trade deficit narrowed substantially to USD28 million in December from USD1,393 million the previous month, which would improve the nation’s current account deficit. The Jakarta Post reported Wednesday that as many as 52 national strategic projects in the form of toll roads, sea ports and special economic zones are scheduled for completion this year as part of the government’s mid-term infrastructure development program.

It will provide a massive boost to the Indonesian economy this year. In addition, President Joko "Jokowi" Widodo stated on Wednesday that his administration will submit an omnibus bill on job creation to the House of Representatives this week as the government strives to attract more investment.

According to President Jokowi, the government has identified 1,244 articles and 79 laws as of Wednesday afternoon that would be revoked by the omnibus law. More importantly, ongoing US-China trade truce will likely fuel more long positions in the high-yielding IDR in the first half this year.

"We believe implied vols of USD/IDR will remain subdued in the foreseeable future, continuing to support the so-called carry trade with a high Sharpe ratio," the report commented.

Meanwhile, the IDR is expected to advance further with the BI’s nod for more gains, but with rising risks of technical corrections. BI Deputy Governor Dody Budi Waluyo told reporters in Jakarta on Monday that intervention measures won’t be taken by the Indonesian central bank as long as the rupiah appreciation is in line with fundamentals, Scotiabank further noted in the report.