IDR:  Rate Cut Might Not Be Necessary

      The recent bounce higher in the USDIDR towards the 13700 levels was due to market expectations of an imminent rate cut by BI to bolster growth as well as concerns of upcoming Fed rate hikes. This followed the BI governor’s comments that BI could “ease monetary policy if the room is available and supported by data” and such a move could take place at its 16 Jun meeting if global macroeconomic condition remains stable.

      We do not expect further easing measures to come so soon as the central bank would want to avoid creating any policy-driven volatility during the transition to a new benchmark rate and the re-adjustment of the interest rate corridor effective 19 Aug. We believe that there are other avenues for BI to increase credit growth to fund infrastructure building and spur growth instead of cutting rates.

      Given these recent market developments, we now expect the USDIDR to remain elevated above the 13000 levels for the rest of the year. We expect the pair to trade higher to 13600 by end-2Q before easing off to around 13300 by end-3Q and 13150 by end-2016. The downside pressure should continue into 2017 and allow the pair to end 1Q 2017 at 12950.