Wednesday, 19 February 2020

BI Reduces Reference Rate, Government Bonds Prices Increases



Mahinda Arkyasa

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  • Bank Indonesia (BI) Governor Perry Warjiyo. TEMPO/Hilman Fathurrahman W

    Bank Indonesia (BI) Governor Perry Warjiyo. TEMPO/Hilman Fathurrahman W

    TEMPO.CO, Jakarta - Bank Indonesia's (BI) decision to lower its reference rate by 25 base points has boosted the price of government bonds (Surat Utang Negara – SUN). Fixed income analyst of MNC Securities I Made Adi Saputra, said that the decision comes as a surprise for market players.

    Previously, a number of analyst had predicted Bank Indonesia to maintain its reference rate, which on July has been reduced from 6 percent to 5.75 percent. However, BI's governing council meeting on Thursday, August 22, 2019 decided that the reference rate will be lowered from 5.75 percent to 5.5 percent.

    As a result, Made explained, the price of SUN increases. Several series of government bonds experiencing an increase are the FR0078 series, which experienced a 30 base points increase compared to yesterday's closing session a lower yield of 7.21 percent. Similar effect was also apparent on the FR0082 bond series, which experienced a price increase of 30 base points and a lower yield of 7.24 percent.

    "Today's decision was quite surprising where the market players estimated BI to maintain its reference rate," Made said as quoted by on Thursday, August 22, 2019.

    Although BI's reference rate had experienced a decrease, Made said that the yield projection for 10 year bonds remains at a level at 7.11 percent by the end of the year.

    Previously, BI Governor Perry Warjiyo said that the policy is consistent with the prediction of lower-than-average inflation rate, high interest in domestic asset profits, and preemptive steps to drive economic growth as an effect of slow global economic growth.

    In response to the condition, a number of central banks around the world has decided to take a more relaxed monetary policy, including what was done by the Fed on July 2019.

    In line with the reduction of interest rate, the Rupiah exchange rate continue to move in accordance with the current fundamentals, which in turn help to support the domestic economy. In the future, Rupiah will remain stable in line with the prospects of foreign capital inflow.