BUZZ-COMMENT-Volatile rupiah may just dissuade BI from rate cut

Credit: REUTERS/BEAWIHARTA

July 16 (Reuters) - Bank Indonesia faces an all-too-familiar predicament at Thursday's rate-setting meeting: should it cut rates for the fourth time this year to support flagging growth or prioritise exchange rate stability?

Fourteen of 26 analysts in a Reuters poll predicted BI would cut its benchmark rate by 25 basis points to 4.00%, its lowest since at least 2016 .

But the Indonesian rupiah's 4.3% drop since BI's June meeting, including a 1.5% drop Wednesday on fears of an imminent rate cut, may just tilt the scales in favour of a pause.

The "burden-sharing" agreement unveiled last week between BI and the government has raised concerns about how debt monetisation will affect inflation and the IDR . The central bank may prefer to let the dust settle before proceeding further with its easing cycle.

Despite these concerns, Indonesian bonds have so far held steady as their high yields remain attractive to foreign investors. BI is unlikely to upset this stability by pushing bond yields lower with an immediate rate cut.

The finance minister's dire Q2 GDP forecast, inflation at a 20-year-low and below the central bank's target range and BI's dovish assurances make future rate cuts almost certain. But, for now, IDR stability may take precedence.

For more click on FXBUZ

IDR: https://tmsnrt.rs/3h4GsGS

Foreign flows into Asian bonds: https://tmsnrt.rs/2C41Q04

Indonesia rates and currency: https://tmsnrt.rs/2AEZhRn

(Krishna Kumar is a Reuters market analyst. The views expressed are his own)

((krishna.k@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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