(Bloomberg) -- Indonesia’s central bank defied the expectations of practically the entire market when it cut interest rates this week, deepening a period of uncertainty for government bond yields.
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Bank Indonesia cut its policy rate by 25 basis points to 5.75% on Wednesday, despite all 38 economists surveyed by Bloomberg saying they expected the central bank to stand pat.
“It was a risky move by Bank Indonesia which increases financial risk for the country,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA. “With the imminent policy uncertainty emanating from the US, it is really not the time for EM central bankers to ease monetary policy.”
The move came after a prolonged selloff in the country’s government bonds, with the 10-year yield rising by more than 50 basis points since the US election on Nov. 6 — the largest such jump in emerging Asia.
The rate cut is likely to ease the pressure on yields in the near-term, but it has also forced investors to once again reassess their expectations for a central bank that has a history of throwing curveballs. Some analysts warn that rate cuts could lead to a balance-of-payment deficit, creating more uncertainty.
Bank Indonesia has recently appeared more focused on defending the rupiah against a strong dollar, and the country’s beleaguered currency — which has lost almost 5% against the greenback over the past 12 months — was one of the key reasons many investors expected the central bank to delay rate cuts. That assumption has now been proved false.
“We have changed our stance, which is to pro-stability and growth,” Bank Indonesia Governor Perry Warjiyo said at a briefing in Jakarta on Wednesday. He said the central bank continues to look for room for “interest rate cuts in line with global and national economic dynamics.”
Indonesia’s 10-year bond yield rose to 7.32% before the decision, hitting its highest level since Nov. 2022. The yield declined to 7.21% during Thursday trading.
But the outlook for yields is increasingly muddled. One key question for investors is whether the impact of the rate cut on the currency will exacerbate pressure on bond yields. The 90-day correlation between the rupiah and the yield of a Bloomberg Indonesia local-currency bond index stands at -0.58, signaling that the two have been moving in opposing directions. It is the most inverse correlation between yields and currency performance in emerging Asia.