Rupiah Forwards Gain Most Since July on Rate-Rise Speculation

Rupiah forwards gained by the most in more than six weeks and government bonds declined on speculation the central bank will raise interest rates tomorrow.

Bank Indonesia’s board of governors will convene for an extra meeting to evaluate economic, monetary and banking conditions, the central said in a statement yesterday. It kept its reference rate unchanged at the previous monthly meeting on Aug. 15 as growth slowed to the least since 2010 in the second quarter. Bank Indonesia increased borrowing costs by 75 basis points in June and July to 6.5 percent. Inflation rose to a four-year high of 8.6 percent last month from a year earlier.

“Market confidence is the issue as the central bank’s stance has been ambiguous between seeking growth or seeking macroeconomic stability, so a rate move would be positive,” said David Sumual, chief economist at PT Bank Central Asia, the nation’s largest lender by market value. “The rupiah’s weakness has likely snowballed into imported inflation, which adds to reasons for raising rates.”

The one-month non-deliverable forwards gained 0.9 percent in the biggest rise since July 19 to 11,597 per dollar as of 9:35 a.m. in Jakarta, data compiled by Bloomberg show. The contracts traded at a 5.7 percent discount to the spot rate, which declined 0.1 percent to 10,938, the weakest level since April 2009, according to prices from local banks.

A fixing used to settle the forwards set by the Association of Banks in Singapore was set at 11,196 yesterday. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 18 basis points, or 0.18 percentage point, to 19.56 percent, data compiled by Bloomberg show.

Bank Indonesia will likely increase the benchmark interest rate by 50 basis points to 7 percent by the year-end, as inflation in August may be 9.2 percent, which would be the fastest pace since 2008, Bank Central Asia’s Sumual said.

The yield on government bonds due May 2023 climbed one basis point to 8.75 percent, the highest since February 2011, prices from the Inter Dealer Market Association show.

To contact the reporter on this story: Yudith Ho in Jakarta at yho35@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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