Bank Indonesia cut rates with ample legroom

Central bank of Indonesia, delivered a 25 basis points cut today and brought down the key repo rate to 7%. The cut has largely been expected, given the level of inflation in the economy. Latest CPI was just 4.14%, thanks to lower commodity and energy prices. Despite the cut, Indonesian Rupiah is stronger for the day, up 0.25% against Dollar. Market seem to be expecting a larger cut.

In last September, Indonesian Rupiah touched weakest level at 14780 against Dollar, since the financial crisis but snapped back sharply in October and rose to as high as 13200 against Dollar. Rupiah has been consolidating since then, only to test that level once more this month.

Rupiah presents excellent opportunity to go long in against Dollar, if US Dollar continues to weaken broad based. However for that we would like to see Rupiah strengthen above the level seen in October.

Weak Rupiah, which has fallen by 60-70% against Dollar since 2011, is in excellent position to boost economic growth via increase in exports. Moreover, recent drop in energy prices has given the central bank to boost economy via further rate cuts. We expect bank Indonesia to further reduce rates by at least another 50 basis points.