It was no surprise that Bank Indonesia (BI) today left the repo rate unchanged at 6.5%. But BI has become more hawkish on the outlook for inflation despite the prospect that the rupiah will appreciate further. Accordingly, we continue to expect that the repo rate will be lifted by 25bp in December and will then be increased by a cumulative 100bp over the next 12 months. Local currency government bond yields look far too low and a big sell-off is probably imminent.
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