Indonesian Bonds Gain as Slower Inflation Boosts Rate-Cut Bets

  • Government sees consumer-price gains around 3% by year-end
  • Rate reduction most likely in January after Fed, Nomura says

Indonesian sovereign bonds rose this week, pushing the two-year yield down by the most since early October, amid speculation cooling inflation will give the central bank more scope to cut interest rates.

Consumer-price gains eased for a third month in October, to 6.25 percent, and the government is forecasting a further slowdown to around 3 percent by the end of the year. Bank Indonesia cut the primary reserve requirement for lenders on Nov. 17 and left its benchmark rate unchanged, to provide support to the economy while guarding against further currency weakness.

“The market is getting comfortable with the inflation trajectory," said Vivek Rajpal, an interest-rate strategist at Nomura Holdings Inc. in Singapore. “The market sees some space for monetary easing developing," he said, adding that Nomura is forecasting a rate cut in January 2016 after the central bank weighs the reaction to a likely Federal Reserve rate increase in December.

The yield on the notes due July 2017 dropped 15 basis points this week, the most since the period ending Oct. 9, to 8.28 percent in Jakarta, according to the Inter Dealer Market Association. The yield rose two basis points on Friday. The 10-year yield fell five basis points from Nov. 20 to 8.6 percent. Indonesian local-currency bonds have gained 1.3 percent in the past month, the best performance in Asia.

Rupiah Weakens

Bank Indonesia Governor Agus Martowardojo and his board lowered the reserve requirement to 7.5 percent from 8 percent, effective Dec. 1, while keeping the policy rate at 7.5 percent, where it’s been since February. The central bank is committed to stability and has held rates steady because of the Fed, China and commodity prices, Martowardojo told reporters in Jakarta on Tuesday.

The rupiah fell 0.9 percent this week and 0.3 percent on Friday to 13,776 a dollar in Jakarta, according to prices from local banks. The currency has lost 0.6 percent in November, following a 7 percent rally in October that was the biggest since 2009.

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