BI likely to leave policy rate unchanged on Thursday, keep door open to additional rate cuts: Scotiabank

Bank Indonesia (BI) is expected to leave its policy rate unchanged at 5 percent at its monetary policy meeting on Thursday afternoon, but leave the door open to additional rate cuts to prop up the nation’s economic growth, according to the latest research report from Scotiabank.

Indonesia unexpectedly swung back to a USD161 million trade surplus in October as the nation’s imports tumbled 16.39 percent y/y last month, compared with the median forecast in a Bloomberg poll for a deficit of USD300 million.

Indonesia’s CPI inflation eased to 3.13 percent y/y in October from 3.39 percent y/y the previous month and will slow further during the remainder of the year on the back of the base effect, providing scope for the Indonesian central bank to deliver more rate reductions in the future.

Indonesia’s benign inflation outlook will prompt foreign investors to keep pouring funds into local bond markets for higher returns. The IDR has been running a tight correlation with the 10-year Indonesia government bond yield, while remaining vulnerable to capital flight as portfolio investment inflows play a substantial role in financing the nation’s current account deficit and can be withdrawn at a short notice.

According to the BI data, about 39.1 percent of total outstanding Indonesia government bonds are owned by foreign investors. Implied vols of USD/IDR have been falling since late August, largely due to a steady yuan exchange rate and easing US-China trade tensions, the report added.

US Commerce Secretary Wilbur Ross said on Fox Business on Friday that what’s is important is that both China and the US wants to make a deal, which will be completed "in all likelihood."

In the meantime, China's Xinhua news agency reported on Sunday that Chinese Vice-Premier Liu He, US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin held a phone call on Saturday, discussing the two sides' core issues for the first phase of an initial trade deal, and agreed to maintain close communication.

According to the report, the high-level phone call was "constructive." China's commerce ministry also announced in a statement on Sunday that top Chinese and US trade negotiators held "constructive" discussions over the phone on a preliminary trade deal between the two countries.

We note China’s announcements stopped short of using phrases like "substantial progress" or "reaching consensus" as it had in the previous statements about such calls. It could prevent risk-on sentiment from booming too across the markets," Scotiabank further commented in the report.