IDR seen to remain stable between 13,200-13,400 as long as Fed continues to normalize rates gradually, says Commerzbank

Bank Indonesia (BI) surprised the markets last Friday by delivering another 25 bps rate cut to 4.25 percent and remained firmly in a dovish stance. There was some cautiousness ahead of the meeting given the hawkish Fed which maintained its projection of four more hikes through to 2018.

The reasons for the 2nd reduction after the cut last month were clear, well contained inflationary pressures and pressure to do more to help lift modest growth. Inflation has picked up from the low of 3 percent earlier this year but has averaged only 3.9 percent in the first eight months of the year. This is within BI’s target range of 3-5 percent but more importantly, BI does not see a significant pick up in inflationary pressures for the foreseeable future.

On growth, it has languished around 5 percent in the past three years or so and BI projects 5-5.4 percent this year. This pace is respectable by regional standards but it is below potential growth of closer to 6-7 percent. It is also well short of President Jokowi’s 7 percent target by the next general election in 2019.

In order to see growth spring back above 6 percent, the government needs to do more to revive private investment and loans growth. In the meantime, given well behaved inflation, BI is likely to do more and cut by another 50bp by year-end to support growth. One key condition however is continued IDR stability.

"USD/IDR eased slightly last Friday but it has been stable between 13,200-13,400 since the start of the year. This should persist as long as the Fed continues to normalize rates at a gradual pace," Commerzbank commented in its latest research report.

Meanwhile, FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest