Bank Indonesia (BI) decided to maintain the nation’s key interest rates during its last meeting, including the BI-Rate at 6.00%, the Deposit Facility rate at 5.25%, and the Lending Facility rate at 6.75%. This decision aligns with market expectations and reflects BI’s strategy to keep inflation within the target range of 2.5% ±1% for both 2024 and 2025. Additionally, this move aims to support the stabilization of the Rupiah while ensuring Indonesia remains attractive to foreign capital inflows.

BI Prioritized Rupiah Stability

BI’s monetary policy has maintained its focus more towards stabilizing the Rupiah amid growing geopolitical and global economic uncertainties. These stem from recent developments in the United States and China, as well as increased demand for U.S. assets following Donald Trump’s election victory earlier this month.

This surge in demand for U.S. assets has led to foreign outflows from Indonesian markets, contributing to a stronger U.S. Dollar. The Dollar Currency Index (DXY) rose, resulting in a 1.43% month-to-date (MTD) depreciation of the Rupiah to IDR 15,935 as of 21 November 2024.

Simpan Views

What are BI’s Next Plans?

We anticipate that BI may begin cutting interest rates following the Federal Reserve’s (Fed) anticipated reduction of its benchmark rate during the December Federal Open Market Committee (FOMC) meeting. We expect both central banks to lower rates by 25 basis points (bps), potentially reducing the BI-Rate to 5.75% and the Fed Funds Rate to 4.50%.

However, we believe the pace of rate cuts will slow as U.S. inflation continues to decline gradually. Central banks will remain cautious, closely monitoring economic developments in the U.S., which could have spillover effects on global markets, including Indonesia.

How Should You Respond To This?

While uncertainties persist, staying focused and aligned on your investment goals is important. Currently, the 10Y Indonesian Government Bond Yields are at around 6.9-7.0% (gross). We think that despite volatility in global markets, the real rates of returns of Indonesian Government Bonds (minus Inflation) is appealing. Taking a longer term view,  the start of the rate cut cycle and monetary easing in the short-to-medium term is expected to reduce government bond yields. 

We believe investing further in Simpan Bond Fund provides a balanced option for those seeking income generation and capital preservation in the medium term.