Asia Rates: BI and BOK expected to stay on hold

IndoGBs exceptionally resilient; hard for KRW IRS to price more rate cuts
Group Research, Duncan Tan25 May 2023
    Photo credit: Unsplash Photo

    IDR Rates - We expect BI to extend its pause at today's meeting, keeping the policy rate at 5.75%. Considering recent comments by BI Governor that the inflation trajectory, if favourable, could open up room for rate cuts in the coming months, we think markets will be focused today on any hints around the potential timing of rate cuts.

    IndoGBs have been exceptionally resilient over the past two weeks when 5Y and 10Y UST yields have climbed  30-40bps. During this time, 5Y and 10Y IndoGB yields are roughly unchanged. One key anchor for IndoGBs could be the strong fiscal position. Up to April-end, budget is in surplus of IDR235tn or around 1.12% of GDP. Even with some expected moderation in fiscal performance ahead, due to potentially weaker global outlook and lower commodity prices, IndoGB issuance requirements could turn out to be smaller than planned/budgeted. Indeed, at the last two auctions (16 May and 23 May), we note that issuance size was below indicative target and this was despite the low borrowing yields and large incoming bids.

    KRW Rates - We expect BOK to keep policy rate unchanged at 3.50% in today's decision. We also expect BOK Governor to maintain a hawkish tone and push back against rate cut expectations, amid still sticky core inflation and uncertainty around Fed policy path. KRW IRS rates have followed US rates higher over the past two weeks, though the beta has been smaller because of less upward pressures on USDKRW (as compared to February). As long as BOK continues to push back, it would be difficult for KRW IRS rates to price for more rate cuts and to fall significantly from current levels, even if US rates stabilizes.



    Duncan Tan

    Rates Strategist - Asia

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