Indonesian Rate Cut Supports Bonds as Rupiah Shrugs Off Attack

  • Maybank expects at least one more interest-rate reduction
  • Markets likely to focus on fundamentals: Standar Chartered

Indonesian government bonds had their best week in three months as the central bank cut its policy rate, while the rupiah shrugged off a terrorist attack in Jakarta to record a small increase.

Bank Indonesia lowered the reference rate 25 basis points to 7.25 percent on Thursday and pledged to maintain an accommodative policy as it seeks to spur an economy that’s been hit by a plunge in commodity prices and China’s slowdown. The first reduction in borrowing costs in 11 months was forecast by a slim majority of analysts and came on a day when seven people were killed in explosions and gunfire in the biggest such incident in the capital since 2009.

“Macro fundamentals for local-currency bond markets in Indonesia are positive,” said Nagaraj Kulkarni, a senior Asia rates strategist at Standard Chartered Plc in Singapore. “The market response to yesterday’s event was short-lived. We expect financial markets to be more focused on the macroeconomic fundamentals.”

The yield on Indonesia’s 10-year sovereign bonds declined 28 basis points this week to 8.53 percent as of 4 p.m. in Jakarta, while that on the two-year notes fell 30 basis points to 8.29 percent, prices from the Inter Dealer Market Association show. Both tenors had the biggest five-day drop since Oct. 9.

Bond Inflows

Overseas investors bought a net 10.48 trillion rupiah ($754 million) of local-currency government securities in the month through Jan. 13, according to Finance Ministry data, as a report showed inflation slowed to 3.35 percent in December, from more than 7 percent in August. Southeast Asia’s largest economy is forecast to have grown 4.7 percent last year, the least since 2009, according to a Bloomberg survey.

Bank Indonesia is likely to deliver at least one more interest-rate cut, which could come at the March review, as the authorities look to support growth, Malayan Banking Bhd. analysts led by Saktiandi Supaat in Singapore, wrote in a research note Thursday.

The rupiah strengthened 0.2 this week to 13,894 a dollar in Jakarta, prices from local banks show. The currency dropped 0.6 percent on Thursday on the terror attack, which local police said was planned by an Indonesian member of Islamic State, before rebounding 0.1 percent on Friday. The rupiah is among the better-performing Asian currencies this year, losing 0.8 percent following a 10 percent decline in 2015.

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