Indonesia's central bank signalled on Wednesday it was not in a hurry to start hiking rates with its reassuring message on inflation, prompting gains in bond and stock markets and helping the rupiah recoup early losses. Bank Indonesia (BI) kept its key rate at a record low as expected, but surprised markets by talking about a further decline in inflation in months ahead rather than looming price pressures next year.
Speculation that an anticipated rebound in inflation may prompt the central bank to tighter sooner rather than later sparked foreign selling of bonds in the past week, pressuring the rupiah. But benchmark five-year and 10-year government bond yields fell at least 5 basis points after the central bank statement. Stocks closed up 1.6 percent, while the rupiah rebounded from an intraday low.
"The central bank doesn't want to tighten prematurely but they want to maintain the market confidence," said economist David Cohen of Action Economics in Singapore. The central bank, which kept its said benchmark rate at 6.50 percent for the third month running, predicted inflation would come down towards levels enjoyed by its neighbours over the medium term and said the authorities were strongly committed to achieve that.
Indonesia's stocks, rupiah and high-yielding bonds have attracted strong demand this year, fuelled by the country's relatively rosy growth outlook and attractive returns. But foreigners, who added a record 8.2 trillion rupiah worth og government bonds last month, turned into net sellers last week amid speculation that interest rates will go up as soon as early next year. The selling weighed on the rupiah, Asia's top performer this year, whose strength helped drive Indonesia's inflation to nine-year lows.
SOOTHING MESSAGE: The currency fell in morning trade in anticipation of a hawkish message from the central bank, but regained ground after the statement. Price data earlier this week that showed annual inflation eased to 2.57 percent in October, its lowest since June 2000, and the central bank's soothing comments, persuaded analysts that any tightening was still months away.
"BI expects inflation to remain benign so there's no urgency for the central bank to hike its rates until year-end." said Budi Susanto, bond analyst at Danareksa Sekuritas. Enrico Tanuwidjaja, strategist at OCBC bank in Singapore, said the central bank seemed particularly keen to calm the currency market with its pledge to contain inflation, but that meeting inflation targets would also support bonds.
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