Bank Indonesia likely to hike benchmark interest rate by 25 bps at Wednesday’s meeting, says ANZ Research

Bank Indonesia is expected to hike its benchmark interest rate by 25 basis points at the unscheduled central bank meeting on Wednesday, May 30. Other measures to stabilize financial markets could also be announced, according to the latest report from ANZ Research.

New Bank Indonesia Governor Perry Warjiyo is looking to act decisively to stabilise the rupiah. With sound economic fundamentals and the rupiah undervalued following the recent sell-off, the new governor’s comments about getting ahead of the curve are expected to be positive for the currency, especially if backed up by a rate hike this week.

In response to the weakening of the rupiah, BI hiked interest rates at their May 17 meeting to 4.50 percent. The IDR remained under pressure despite that rate hike as the market did not view it as sufficient, especially when US 10-year bond yields moved above 3.1 percent.

"Therefore, we recommend selling 3M USD/IDR NDF at 14,179 (spot reference 14,006), targeting 13,800 with stop-loss at 14,350," the report added.

With new Governor Perry looking to take firmer action, there seems scope for a rebound in the domestic currency. Given the large portfolio outflows seen this year, there is scope for inflows to resume.

Meanwhile, the recent pullback in US 10-year bond yields below 3 percent and the retreat in oil prices, if sustained, will also improve appetite for EM assets. With Indonesia’s inflation well contained, further interest rate increases will make real interest rates in the country attractive for investors.

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