BI likely to pause rate cuts, expects USD/IDR to stabilize around 14,000

Governor of Bank Indonesia, Perry Warjiyo, hinted yesterday that the policy rate is close to a peak and it might remain unchanged for the near future. The main reasons are because inflation continues to be in control and within the central bank’s 2.5 percent to 4.5 percent target range, and more significantly, the solid recovery in the currency.

The Indonesian rupiah has strengthened against the US dollar by more than 9 percent in the last three months, with USD/IDR trading at the 14,000 level after reaching a high of almost 15,300 last October. There are several reasons for this such as the aggressive BI rate hike totalling 175 basis points to 6 percent in 2018; the sharp drop in oil prices by almost 40 percent in the fourth quarter of 2018. Even if the oil prices have rebounded by almost 15 percent since the beginning of the year, IDR has not suffered that much. The third reason is a less hawkish Fed which has pared back appreciation pressures on the USD.

Governor Warjiyo downplayed expectations of a rate cut anytime soon and repeated that the IDR continues to be undervalued. These remarks are possibly aimed to cement sentiment in Indonesian rupiah rather than to suggest the central bank is looking for additional gains.

“We suspect BI is content to see USD-IDR stabilize around 14,000 for now. A further slide towards the 13,700 level will probably be driven by a general USD weakness story rather than IDR strength across the board”, added Commerzbank.