Oil Surge Casts Doubt Indonesia Will Cut Rates

(Bloomberg) -- The sudden surge in crude prices is casting doubts among bond traders over Bank Indonesia’s capacity to cut interest rates. In contrast, its counterpart in the Philippines appears on track to ease.

Traders are trimming bets for Bank Indonesia to act on Thursday amid concerns a third rate cut in as many months could worsen the rupiah’s losses. Bangko Sentral ng Pilipinas, on the other hand, is likely to press ahead with another reduction next week as subdued inflation offers room for stimulus to shore up growth.

“Bond yields are indicating that traders are not confident about Indonesia’s ability to cut, especially with rupiah concerns bubbling again,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “BSP has employed a strategy of communicating easing that’s in the pipeline and they tend to stick with their script.”

Oil Surge Casts Doubt Indonesia Will Cut Rates

Indonesia’s 10-year sovereign yield surged 8 basis points on Monday, its biggest one-day jump in a month, and added another basis point to 7.28% Tuesday. The rupiah has declined almost 1% this week to 14,082 per dollar.

The yield on Philippine bonds due in 2029 has dropped 14 basis points to 4.74% after climbing 18 basis points Monday. The rise in oil prices following the weekend attack on Saudi Arabia’s oil facilities is “not yet a worry, Governor Benjamin Diokno said Wednesday after flagging that a rate reduction could take place as early as this month.

“By the time the central bank comes to meet in September, we’ll have a bit more clarity on whether oil prices will be sustained at current highs,” said Chidu Narayanan, an economist at Standard Chartered Plc in Singapore. “Given that inflation is already well below the central bank’s target rate, that shouldn’t affect the response we expect from the central bank very massively.”

©2019 Bloomberg L.P.

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