Indonesian Bonds in Longest Rally in a Decade as More Cuts Seen

Updated on
  • Policy rate lowered for second time this year on Thursday
  • ANZ, ING and Nomura see at least one more rate reduction

Indonesia’s two-year sovereign advanced for a seventh week, the longest run of gains since 2006, on speculation the central bank isn’t done cutting interest rates just yet.

Bank Indonesia lowered its policy rate for the second time this year on Thursday, and Australia & New Zealand Banking Group Ltd., ING Groep NV, Capital Economics Ltd. and Nomura Holdings Inc. said they were expecting one or more reductions in the coming months. The monetary authority also took the surprise step of cutting lenders’ reserve-requirement ratios by a percentage point, after President Joko Widodo said last week that he wanted to see interest rates fall further to spur growth.

The yield on the notes due July 2017 fell two basis points this week to 7.58 percent as of 4:12 p.m. in Jakarta, according to the Inter Dealer Market Association. It rose three basis points on Friday after dropping four basis points on Thursday. The yield has declined 103 basis points in seven weeks as rupiah sovereign securities returned 5 percent in the best performance in Asia, Bloomberg indexes show.

“So long as inflation is under control, there is potential for interest rates to go down further,” said Wiling Bolung, head of balance-sheet trading at PT Bank ANZ Indonesia in Jakarta. “They have to ensure that they are supporting growth now.”

Inflation Forecast

Consumer prices rose 4.14 percent in January from a year earlier and Bank Indonesia said Thursday it expects inflation to be around the mid-point of its 3 percent to 5 percent target range in 2016. The central bank lowered its key rate by 25 basis points to 7 percent this week, following a cut of the same magnitude in January.

President Widodo said in a Feb. 11 interview that while the central bank was independent, he would like interest rates to “fall, fall, fall, fall, and keep falling so the real sector can compete with other countries.” Indonesia’s economy expanded 4.79 percent in 2015, the least since 2009.

The rupiah was little changed on Friday and for the week at 13,499 a dollar, according to prices from local banks. It’s gained 2.1 percent this year, the best performance among Asia’s emerging markets.