Indonesia bonds gain as central bank cuts rates

Indonesia’s bonds advanced for an 11th day and the rupiah dropped, reversing earlier gains, as Bank Indonesia unexpectedly cut its benchmark interest rate for the first time in three months today.

The central bank reduced the reference rate by 25 basis points to 5.75 per cent. Only four of 15 economists surveyed by Bloomberg predicted the move, with the rest expecting the rate would be left unchanged. Offshore funds boosted holdings of government debt by 5.7 per cent to 235.54 trillion rupiah ($26.3 billion) this year through February 7, finance ministry data show.

“The bonds have been climbing for the past few days, probably because some investors were anticipating a rate cut,” said Handy Yunianto, a fixed-income analyst at Mandiri Sekuritas in Jakarta. “There has also been a lot of interest from foreign investors in Indonesian assets. The rate cut is negative for the currency.”

The yield on the government’s 7 per cent debt due May 2022 fell eight basis points, or 0.08 percentage point, to 5.10 per cent, according to midday prices by the Inter-Dealer Market Association.

The country sold 12trn rupiah of local-currency notes this week, exceeding its 8trn rupiah target, the finance ministry said in a statement. The sale drew 42trn rupiah of bids, it said. Moody’s Investors Service awarded Indonesia an investment-grade credit rating last month, following Fitch Ratings in December.

Bank Indonesia, which cut borrowing costs twice in the final quarter of 2011, kept the benchmark rate unchanged in the previous two policy meetings. Inflation in Indonesia slowed for a fifth straight month in January to 3.65 per cent.

The rupiah weakened 0.5 per cent to 8,978 per dollar as of 3:30 pm in Jakarta, according to prices from local banks compiled by Bloomberg. The currency rose as much as 0.4 per cent to 8,900 earlier.

Southeast Asia’s largest economy, which grew 6.5 per cent last year in the biggest gain since before the Asian financial crisis, may expand less than 6 per cent this year if Europe suffers a severe recession, according to Bambang Brodjonegoro, head of fiscal policy at the finance ministry.