CIMB IDR Bond and FX Market Report - June 2014

Improving inflation outlook in Indonesia, smooth Presidential election process and steady Rupiah in the coming months should open the possibility of rate cuts by Bank Indonesia. Lower interest rate should improve Indonesia economic growth and also potentially positive to Indonesia financial market.  
 
Indonesia is still facing a major headache to the economy which is coming from the fuel subsidy. Fuel subsidy has burdened government budget and also lead to trade deficit. Higher budget and trade deficit would weaken Rupiah and reduce the possibility of interest rate cuts.
 
Strong economic growth in the US as indicated by strong labor market, rising consumption and improving property market have started to increase inflation pressure. Inflation in the US has increased to a more normal level at around two percent. Higher inflation could be the reason behind slowly rising USD money market rates.  
 
China continued reducing banks’ reserve requirement and expanding to some national lenders not just banks in rural areas to boost economic growth. European Central Bank also might add monetary stimulus to lower unemployment rate and to avoid deflation threat. Weak economic growth and low inflation have forced China and Euro-Zone central banks still taking accommodative monetary policy versus more restrictive monetary policy in the US.
 
Stronger economy in the US might increase consumption and import. Weaker Yuan and Euro resulting from accommodative monetary policies taken by each central bank could boost export to the US and benefit China and Euro-Zone economic growths. Global economy would be better off with the latest development.