Indonesia's domestic data was softer than expected. CPI inflation was a little slower at 7.26%y/y in June (consensus: 7.40%y/y). Trade data was particularly disappointing. Export growth was almost twice as bad as expected, with annual growth falling 15.24%y/y (consensus: -8.11%y/y). Annual import growth was also very poor, falling 21.4%y/y (consensus: -12.4%y/y). After Q2 GDP shrank for a second quarter in a row (-0.18%q/q, cons: +0.25%q/q), the poor trade performance highlights the challenge facing President Widodo.
Therefore, IDR was one of the worst performing AXJ currencies last month (-1.1% against USD), says RBC Capital Markets.
The President has set himself a target of 7% growth by 2017. Nevertheless, BI left its reference rate at 7.50%, as expected. Though June CPI inflation was slower than consensus, BI previously said that it would have scope to lower rates if inflation fell below 5%, which seems some way off.
"We think the risk to market pricing (-10bps by year end) is that BI does not cut rates at all", according to RBC Capital Markets.