Bank of Indonesia to remain on hold

The Bank of Indonesia (BI) is expected to remain on hold at its monetary policy meeting in October. Indonesia's September CPI printed at 6.83% yoy (the first sub-seven percent inflation in the past five months). Despite this, however, headline inflation is still way above the BI's target corridor of 4±1% this year and next and there is no reason to believe that the BI would opt for a rate cut at this juncture. 

Also, the recent surge in IDR is unlikely to provide any sense of comfort. This appreciation is not based on any fundamental improvement in macro economic conditions in Indonesia. Rather, the improved performance is part of the risk-on rally that EM assets are currently experiencing which is a result of weak US data, and this pushes back the timeline of any Fed rate hike further. Also, the announcement of the second economic reforms package did provide a boost to the currency. However, that boost is likely to be short lived as it is believed that the government will find it difficult to walk the talk and eventual implementation of the announced packages will take some time. 

For some time, the BI has been talking about its determination in preventing the currency from weakening but the bank has not been successful in defending the currency, for now at least. Recent IDR appreciation has less to do with the BI's intervention in the market, than the factors explained above. It is believed that the recent rally is not built on strong foundations and hence, once the dust settles and a clearer timeframe emerges about the likelihood of the Fed rate hike, the IDR will resume its downward journey once again.