Indonesian bonds mixed after Bank Indonesia leaves policy rate unchanged, likely to rally

The Indonesian government bonds closed mixed on Thursday as Bank Indonesia (BI) left policy rate unchanged at 6.75 pct, as expected. The yield on the benchmark 10-year bonds, which moves inversely to its price, closed higher 0.16 pct to 7.424 pct and the yield on the 1-year bonds fell 1.05 pct to 6.900 pct.

The Bank Indonesia kept the reference rate on hold at 6.75 pct today, on par with expectations, after lowering the rate three straight times in Q1 by 75bps. Bank Indonesia had kept the rates on hold for most part of last year. This was because of certain factors, such as deceleration in inflation to below 4 pct by late 2015 due to lower oil prices. The central bank projects inflation to be normal around 3-5 pct in 2016. Deceleration of inflation gave the way for the central bank to lower rates in the past few months.

BI is expected to lower rates by additional 25-50bps in 2016, especially if inflation decelerates, noted Commerzbank. Moreover, the central bank is expected to also lower reserve requirement ratio by additional 100-150bps in order to push banks to boost lending.

“We see inflation at 4.4 pct in 2016 and growth at 5.4 pct vs the government’s forecast of 5.2-5.6 pct and 4.8 pct in 2015”, added Commerzbank.

In addition, the March exports figure tumbled 14 pct y/y, against market expectation of 14.04 pct y/y, from 7.2 pct y/y decline in February. March Imports were also down 13.1 pct, against market consensus of 12.02 pct, as compared to 11.7 pct in February and oil and gas exports fell 38.2 pct y/y, from 36.5 pct y/y in February, indicating weak domestic demand and resulting in a trade surplus of USD 1.65bln. We expect the Bank Indonesia’s easing trend to continue in 2016 due to ongoing weakness in China and the Eurozone.

Meanwhile, the Bank Indonesia governor Martowardojo said recently that the central bank still has room to ease monetary policy, adding that Bank Indonesia would be data dependent albeit more cautious in future policy decisions.

Lastly, if exports, inflation and GDP growth fail to improve over the coming months, easing will occur sooner rather than later, pushing bonds prices further up.