Bank Indonesia Waiting On The FED

It’s not just the US consumer that is waiting on the outcome from the FED, but Central Banks around the world.

• Bank Indonesia has been forced to issue US$49bn (equivalent) of short dated bonds (known as SRBI), at higher yields than short dated government bonds
• Today the BI will issue 28 day and 84 day SRBIs.
• The issuance of SRBI’s has been required to help the central bank support the currency
• The impact however has been that the SRBI issuance has now crowded out short term government bonds as they offer higher yields.
• This has left the Central Bank in a holding pattern, waiting for the FED to cut rates and hence alleviate the pressure on the rupiah. IDR is the third worst performer in the EM Asia FX YTD to date (down 5.7%, with KRW the worst at -7%, followed by TWD at -6.6%)
• This is a theme that will be consistent during the second half of the year as the impact of FED policy impacts currencies across the region.
• Of course, BI may not follow the Fed step-for-step because of the extent of recent rupiah weakness. It has been using macroprudential policy to support the economy and so it is unlikely to be in a hurry to cut rates if it believes that would risk FX stability.