Indonesia: The time is ripe for a rate cut - TDS

In the view of analysts at TD Securities, the Bank Indonesia is likely to cut the benchmark interest rates this Thursday amid firmer IDR, likely Fed easing and low inflation.

Key Quotes:

“We expect Bank Indonesia (BI) to ease policy on Thursday 18th July, with the 7d reverse repo likely to be cut by 25bp to 5.75%. As we previously noted BI has been edging towards a rate cut amid low inflation and slowing activity. IDR appreciation will give sufficient confidence for BI to pull the trigger and begin reversing the 175bp of hikes implemented in 2018.

Since the last BI meeting Fed Chair Powell has cemented expectations of a rate cut by the Fed FOMC at the end of the month, a factor that will give BI greater confidence to cut rates this week.

A rate cut on Thursday is unlikely to derail the IDR’s appreciation as real rates will remain attractive even after a likely 25bp cut, but the recent move below USDIDR 14,000 could be met with USD buying by BI to smooth the IDR's appreciation and bolster FX reserves.

Prospects of monetary easing, IDR appreciation (3.3% ytd versus USD), low inflation and weaker activity both at home and overseas, have been positive for Indonesia’s bonds, with foreign bond inflows strengthening over recent weeks to reach an impressive USD 7.3bn ytd compared to a small USD -229mn outflow at the same time last year.

We think a rate cut this week will encourage further inflows but are cognizant that increasingly long positioning in Indo GBs may stand in the way of much further gains.”