Indonesian Bonds Advance, Rupiah Falls After Interest-Rate Cut

Indonesia’s rupiah fell for a second day and bonds completed a fifth weekly advance after Bank Indonesia unexpectedly cut borrowing costs yesterday.

The central bank reduced the reference rate by 25 basis points to 5.75 percent, a move predicted by four of 15 economists surveyed by Bloomberg, with the rest expecting no change. Overseas investors sold $196 million more local shares than they bought this week through yesterday, exchange data show. Offshore funds raised holdings of government debt by 5.7 percent to 235.54 trillion rupiah ($26 billion) this year through Feb. 7, finance ministry data show.

“Bonds reacted positively toward the rate cut,” said Wiwig Santoso, head of treasury and markets at PT Bank DBS Indonesia in Jakarta. “As the economic fundamentals are solid, investors will come back into equities.”

The yield on the government’s 7 percent security due May 2022 fell 26 basis points, or 0.26 percentage point, this week to 5.03 percent, according to midday prices from the Inter- Dealer Market Association. The rate fell five basis points today.

The currency also weakened after European leaders held back a bailout package for Greece. The country must pass its latest austerity package into law before European leaders endorse 130 billion euros ($173 billion) of aid, Luxembourg Prime Minister Jean-Claude Juncker said yesterday.

The rupiah declined 0.7 percent to 9,033 per dollar as of 3:10 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. It fell 0.6 percent this week, the steepest decline since November.

“The exchange rate is relatively stable and won’t be much affected,” Bank Indonesia Deputy Governor Halim Alamsyah said yesterday after the interest-rate decision.

The central bank has been intervening in the foreign exchange and bond markets to prevent volatility, Governor Darmin Nasution said today.

“As a policy response to preserve macro and financial system stability, the central bank implemented a dual intervention strategy in the foreign exchange and government bond markets simultaneously,” Nasution said at a seminar in Jakarta today. “This strategy has stabilized both the currency and bonds.”

The country sold 12 trillion rupiah of local-currency notes this week, exceeding its 8 trillion rupiah target, the finance ministry said in a statement. The sale drew 42.38 trillion rupiah of bids, it said. Moody’s Investors Service awarded Indonesia an investment-grade credit rating last month, following Fitch Ratings in December.

To contact the reporter on this story: Khalid Qayum in Singapore at kqayum@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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