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Rupiah's advance in question with slowing economy, rate cuts

[SINGAPORE] The rupiah's stellar rally may run out of steam after Bank Indonesia (BI) cut its benchmark interest rate and signalled the economy will expand less this year than previously thought.

With Indonesia overtaking Singapore as South-east Asia's coronavirus hotspot, and more rate cuts on the cards, analysts at Rabobank and HSBC Holdings see the rupiah easing in the second half of the year.

The currency's 15 per cent surge against the dollar this quarter has owed a lot to support from the central bank. But now that the rupiah has regained ground it lost during a sharp selloff in March, BI looks like it is in a position to step back a little.

When BI kept rates on hold at its May meeting, governor Perry Warjiyo said he was mindful of the "need to maintain exchange rate stability". As BI lowered borrowing costs Thursday to 4.25 per cent, Mr Warjiyo noted that the rupiah was under less pressure, though he still thinks it's undervalued.

"Bank Indonesia's latest rate cut clearly reflects the stabilisation in global risk sentiment and the gradual return of capital flows to Indonesia, which bolstered the rupiah," said Joseph Incalcaterra, HSBC's chief Asean economist in Hong Kong.

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HSBC expects another 50 basis points of rate cuts by the end of the first quarter next year and sees the rupiah weakening to 15,200 per dollar by the end of 2020.

The central bank's 2020 forecast for the currency is 14,000-14,600. It closed at 14,100 on Friday.

SECOND-WAVE RISK

Rabobank's projection is for the rupiah to ease to 15,237 by the end of next quarter amid the risk of a second wave of Covid-19 infections.

"The reality of a lack in swift recovery will be seen at a later moment when markets catch up with the real economy," said Wouter van Eijkelenburg, an Asean economist at Rabobank in the Netherlands.

BI pared its growth forecast for the year to 0.9-1.9 per cent on Thursday, from 2.3 per cent previously, and flagged "room for lower interest rates".

INFLOWS TO BONDS

Net purchases of Indonesian bonds by global funds have reached about US$1 billion this quarter, following outflows of US$8.60 billion in the first three months of the year.

Still, the central bank is unlikely to cut its benchmark any lower than 4 per cent because it needs to preserve high enough bond yields to attract fund inflows from overseas, which also supports the rupiah, Wellian Wiranto, an economist at Overeas-Chinese Banking Corp wrote in a note.

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