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Indonesia: Bank Indonesia to ease, but not yet - TDS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 16, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at TDS, expects Bank Indonesia to hold the line on rates tomorrow (17 November), with the Reference rate unchanged at 7.5%, the FASBI rate at 5.5%, and the lending facility rate at 8%.

    Key Quotes

    “While we expect no shift in actual rates, we expect the tone of the statement to be in line with the notable shift from the previous meeting, with a reiteration of a rates-dovish bias from the central bank. However, we’d also expect to perhaps see a hint of caution due to the recent Fed tone change and shift in market expectations around the timing of the first US rate hike.”

    “There are a number of factors behind the central bank’s tone-shift; those of an external macro-financial nature, and those that concern domestic economic conditions.”

    “Should IDR tolerate well the first Fed hike, implying that EM in general is tolerating it well, and BI can be confident that the current account deficit will remains stable at around the 2% level, then we see a cut in the policy rate so long as there are no unexpected surprises on the inflation front.”

    “Indeed we expect no change in the message from BI that easing is in the pipeline, and so long as macro-financial stability conditions are neutral to more positive, they will likely take advantage of the coming drop in inflation and improvement in the external accounts to provide monetary support to the domestic economy.”

    “However, we also note that we shouldn’t expect that this will kick off an extended easing cycle, the likes of which has been seen in India. External vulnerability will remain a medium term concern, and with the Fed expected to hike through 2016 (TD sees Fed funds at 1.25% and the 2yr Treasury at 1.75% by year end), easing by too great a degree would put pressure on IDR over time, in a manner inconsistent with BI’s still very real focus on macro-financial stability and IDR.”

    “We see a cut in Q1 and then the central bank on hold for the duration of the year. There may be a risk bias for more easing, but this will depend on external volatility and global portfolio trends to EM, which may turn constructive if the Fed’s hiking cycle and communication ends uncertainty that has been plaguing emerging markets and causing volatility.”
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