Last week’s surge in the rupiah won’t prompt Bank Indonesia to cut its benchmark rate on Thursday, but it may have opened up a small window for easing in the coming months.
The rupiah strengthened 9.1% in its best performance since 2001 last week as emerging-market assets rebounded on signs the Federal Reserve will keep borrowing costs lower for longer. All 25 economists surveyed by Bloomberg see the central bank holding its policy rate at 7.50% this week, while three of 25 project a cut before the end of the year.
The risk of spurring currency declines is one of the main reasons Bank Indonesia has left benchmark borrowing costs unchanged since February even as the economy grows at the slowest pace since 2009. With the rupiah rebounding and US rate increases now unlikely to arrive until 2016, there could be a window of opportunity for Indonesia to ease later this year, Capital Economics says.
“It has made a cut relatively more likely,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore, referring to the rupiah’s rally. “But the possibility remains low at this point, given that no matter what, there’s still a large degree of uncertainty about the Fed’s trajectory.”
Reforms, Intervention
The rupiah’s surge last week was the biggest among 24 emerging markets tracked by Bloomberg and halved its loss for the year. The currency has held onto most of its gains so far this week, losing 1.4% over Monday and Tuesday with local markets closed on Wednesday for a public holiday.
President Joko Widodo has announced a flurry of reforms in recent weeks including plans to streamline trade regulations, while Bank Indonesia said Sept 30 that it would start intervening in the currency forwards market for the first time to stabilise the rupiah.
Those factors, together with a rebound in oil prices and a run of poor US data that pushed back expectations for a Fed liftoff were behind the rupiah’s surge, according to an Oct. 12 Capital Economics note by economists including Gareth Leather in London.
“Provided the recent rally does not go into reverse over the next couple of months, we see every chance of a rate cut before the end of the year,” he said.
While inflation slowed to a five-month low of 6.83% in September, it’s still above Bank Indonesia’s 3% to 5% target range. If consumer-price gains stabilised and there was more certainty on the Fed rate, we could see a cut in Indonesia early next year, said Fakhrul Fulvian, an analyst at PT Bahana Securities in Jakarta.
A persistent shortfall in Indonesia’s current account, which has been in deficit for 15 quarters through June, reduces the scope for Bank Indonesia to reduce borrowing costs. Barclays Plc forecasts a full-year shortfall in the broadest measure of trade of 2.4% of gross domestic product in 2015, down from 3.1% last year.
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The rupiah strengthened 9.1% in its best performance since 2001 last week as emerging-market assets rebounded on signs the Federal Reserve will keep borrowing costs lower for longer. All 25 economists surveyed by Bloomberg see the central bank holding its policy rate at 7.50% this week, while three of 25 project a cut before the end of the year.
The risk of spurring currency declines is one of the main reasons Bank Indonesia has left benchmark borrowing costs unchanged since February even as the economy grows at the slowest pace since 2009. With the rupiah rebounding and US rate increases now unlikely to arrive until 2016, there could be a window of opportunity for Indonesia to ease later this year, Capital Economics says.
“It has made a cut relatively more likely,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore, referring to the rupiah’s rally. “But the possibility remains low at this point, given that no matter what, there’s still a large degree of uncertainty about the Fed’s trajectory.”
Reforms, Intervention
The rupiah’s surge last week was the biggest among 24 emerging markets tracked by Bloomberg and halved its loss for the year. The currency has held onto most of its gains so far this week, losing 1.4% over Monday and Tuesday with local markets closed on Wednesday for a public holiday.
President Joko Widodo has announced a flurry of reforms in recent weeks including plans to streamline trade regulations, while Bank Indonesia said Sept 30 that it would start intervening in the currency forwards market for the first time to stabilise the rupiah.
Those factors, together with a rebound in oil prices and a run of poor US data that pushed back expectations for a Fed liftoff were behind the rupiah’s surge, according to an Oct. 12 Capital Economics note by economists including Gareth Leather in London.
“Provided the recent rally does not go into reverse over the next couple of months, we see every chance of a rate cut before the end of the year,” he said.
While inflation slowed to a five-month low of 6.83% in September, it’s still above Bank Indonesia’s 3% to 5% target range. If consumer-price gains stabilised and there was more certainty on the Fed rate, we could see a cut in Indonesia early next year, said Fakhrul Fulvian, an analyst at PT Bahana Securities in Jakarta.
A persistent shortfall in Indonesia’s current account, which has been in deficit for 15 quarters through June, reduces the scope for Bank Indonesia to reduce borrowing costs. Barclays Plc forecasts a full-year shortfall in the broadest measure of trade of 2.4% of gross domestic product in 2015, down from 3.1% last year.
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