Fed’s dovish stance provides scope for BI to deliver rate cuts, says Scotiabank

The Federal Reserve’s dovish stance provides scope for the Bank Indonesia (BI) to deliver rate cuts. Meanwhile, a steady Chinese yuan has cleared the way for the Indonesian central bank to lower its policy rate without risking a rupiah slump, according to the latest research report from Scotiabank.

The BI shifting to an easing bias will lower Indonesian government bond yields further, which is expected to attract bond portfolio inflows and prop up the IDR afterwards. Indonesian President Joko Widodo pledged to quickly lower corporate taxes, ease stringent labor laws and lift curbs on foreign ownership in more industries, when speaking with Bloomberg last Friday.

President Jokowi’s reform plans are expected to win the support of the legislature with his coalition securing about 62 percent of seats in the parliament, which will likely boost the high-yielding IDR going forward, the report added.

In addition, the total amount of debt with yields below zero is now standing at around USD12.5 trillion. It will continue drawing investors to the IDR-denominated assets for higher returns. The IDR has been running a tight correlation with the 10-year Indonesian government bond yield and remains vulnerable to capital flight, as portfolio investment inflows play a substantial role in financing Indonesia’s current account deficit and can be withdrawn at a short notice.

According to the BI data, foreign investors are now holding about 39.3 percent of total outstanding Indonesian government bonds. Fed Chairman Jerome Powell told a dinner audience at the Bank of France in Paris on Tuesday the US central bank is "carefully monitoring" downside risks to US growth and "will act as appropriate to sustain the expansion."

Powell highlighted the growing importance of global developments in monetary policy decision, signaling again the Fed is considering an easing of monetary policy to cushion the economy against rising risks from slower global growth and trade-policy uncertainty.

"In the meantime, we keep a close eye on hovering US-China trade disputes that could swing market sentiment between risk appetite and risk aversion abruptly," Scotiabank further commented in the report.