Surprising Interest Rate Cut in Indonesia Causes Market Stir

The Indonesian central bank defied all expectations with a surprising rate move that extends a period of uncertainty for bond yields. Despite predictions from 38 surveyed economists who anticipated an unchanged interest rate policy, Bank Indonesia cut its key rate by 25 basis points to 5.75%. Rajeev De Mello from Gama Asset Management warns that this move could increase economic risks for the country, especially given the unclear monetary policy outlook from the U.S. Nonetheless, the bank hopes that its policy change will support its previous defense of the rupiah against the dollar, after the Indonesian currency lost 4.5% against the dollar over the past year. Bank Indonesia aims to focus on stability and growth. Before the interest rate decision, the yield on ten-year government bonds reached 7.32%, the highest level since November 2022, but fell to about 7.27% after the decision. Further evaluation questions arise from the reaction of the rupiah and the long-term development of bond yields; the inverse relationship between currency and yields is a notable phenomenon in the region. The supply of Indonesian bonds could soon exceed demand, as shown by the recent low bid-to-cover ratio in the auction results of Indonesian certificates and bonds. Bank Indonesia plans significant bond purchases this year to create market buffers, which is also indicated by higher foreign outflows. This is set against the backdrop of a strong U.S. labor market report, fueling speculation about a slowed pace of Federal Reserve rate cuts.