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19 May 2015
Bank of Indonesia expected to favour a weak currency – DB
FXStreet (Barcelona) - The Team at Deutsche Bank, expect the Bank of Indonesia to maintain rates on hold today, and further explain that the central bank might adopt for a gradually weakening currency.
Key Quotes
“We expect BI to keep rates unchanged as it cannot afford to take chance with monetary policy accommodation given concerns about the currency and external financing conditions. The timing for such accommodation for BI will be appropriate in the second half of the year when inflation will likely fall.”
“As we argued in recent EM Monthly, monetary policy in Indonesia is constrained by the risk of a currency driven negative feedback loop. The path of least resistance - and indeed likely the base case for the central bank - is for the currency to keep weakening gradually.”
“Bond yields have arguably greater valuation appeal after the correction from over the past few weeks, and given that the inflation outlook is not immediately threatening. We worry though that fixed income could also end up being increasingly endogenous to currency weakness down the line, both as the pass through into inflation gets progressively non-linear, and as currency losses force offshore investors to stop out of their bond holdings.”
“We stay with our small underweight on bonds, and will look to buy USD-IDR on dips to 13,000.”
Key Quotes
“We expect BI to keep rates unchanged as it cannot afford to take chance with monetary policy accommodation given concerns about the currency and external financing conditions. The timing for such accommodation for BI will be appropriate in the second half of the year when inflation will likely fall.”
“As we argued in recent EM Monthly, monetary policy in Indonesia is constrained by the risk of a currency driven negative feedback loop. The path of least resistance - and indeed likely the base case for the central bank - is for the currency to keep weakening gradually.”
“Bond yields have arguably greater valuation appeal after the correction from over the past few weeks, and given that the inflation outlook is not immediately threatening. We worry though that fixed income could also end up being increasingly endogenous to currency weakness down the line, both as the pass through into inflation gets progressively non-linear, and as currency losses force offshore investors to stop out of their bond holdings.”
“We stay with our small underweight on bonds, and will look to buy USD-IDR on dips to 13,000.”