Rupiah’s Chart-Topping Gain Clears Path for More Policy Easing

(Bloomberg) -- The pathway to another Bank Indonesia interest-rate cut appears to be clear, thanks to a rally in the rupiah and a revival in bond inflows.

With the Indonesian currency beating all its Asian peers this month, policy makers may have room to ease again after a surprise rate reduction on Thursday. In the past, the central bank has frequently cited the need to preserve the rupiah’s stability as a factor for maintaining borrowing costs.

The rupiah has climbed around 20% since sliding to a 22-year low in March, reflecting the turnaround in regional currencies as the dollar weakens. The upturn is creating more policy space for Asia’s central banks to navigate the virus-driven slowdown, with Bangko Sentral ng Pilipinas also moving to lower rates on Thursday.

“The recent rupiah strength has reduced concern over the implications of lower rates on FX levels,” said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. in Singapore. “Real yield differentials remain appealing on benign inflation, which shall help sustain bond inflows.”

The rupiah has climbed about 3% in November and traded around 14,200 per dollar on Friday. Yields on benchmark 10-year debt are near the lowest in almost three years and sovereign bonds are poised for a second month of inflows.

READ: Global Funds Rush Back for Indonesia’s Bonds on Reform Push

With recent indicators suggesting that the economy may struggle to emerge from a recession, some economists are predicting that Bank Indonesia will have to ease again.

“The recent appreciation in the rupiah has opened up fresh policy space,” said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc in Hong Kong. “We think this gives the central bank room for one more 25-basis point rate cut in the first quarter of 2021, assuming global risk sentiment holds up.”

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