Indonesian bonds due 2015 headed for the worst week since January 2011 after the central bank unexpectedly raised its key interest rate for the first time in more than two years. The rupiah fell this week.
Bank Indonesia increased the reference rate by a quarter of a percentage point to 6 percent yesterday. On June 12, the monetary authority boosted the deposit facility rate, known as the Fasbi, by 25 basis points to 4.25 percent and said that was a preemptive move to maintain monetary stability. A proposed increase in domestic fuel prices will add to inflation pressures, according to ING Groep NV.
“The move could be a flanking policy to support a prospective fuel-subsidy cut,” Tim Condon, head of Asia research in Singapore at ING, wrote in a report today. “We think the two to three percentage point inflation spike that would accompany the fuel price hike would trigger a volatility spike” in the bond market, he wrote.
The yield on 9.5 percent bonds due June 2015 rose 94 basis points this week to 6 percent as of 9:43 a.m. in Jakarta, prices from the Inter Dealer Market Association show. The 10-year government bond yield jumped 26 basis points, or 0.26 percentage point, this week to 6.52 percent. ING revised its year-end forecast for the 10-year rate to 6 percent from 5.5 percent, according to the report.
Indonesia has the fastest inflation among Southeast Asia’s five biggest economies. The pace of annual gains in consumer prices, which was 5.47 percent in May, will quicken to 7.2 percent this year if fuel prices are raised, government estimates show. The central bank’s policy rate will be increased by 25 basis points each in July and August, Citigroup Inc. predicted in a report yesterday.
The Finance Ministry bought back government bonds in the secondary market yesterday, according to a statement posted on its website. Notes due in September 2016, April 2017, July 2017 and September 2018 were included in the purchase.
The rupiah dropped 0.8 percent this week to 9,883 per dollar in Jakarta, according to prices from local banks compiled by Bloomberg. It touched 9,925 yesterday, the weakest level since Sept. 15, 2009. One-month non-deliverable forwards rose 0.8 percent today and 0.6 percent this week to 10,062. The contracts traded at a 1.8 percent discount to the spot rate.
One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, surged 4.87 percentage points this week to 13.55 percent. It declined six basis points today.
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