Bank Indonesia surprises with rate cut, prioritising economic growth over currency stability

[JAKARTA] In a surprise move on Wednesday (Jan 15), Bank Indonesia (BI) slashed its benchmark interest rate by 25 basis points to 5.75 per cent, defying market expectations and signalling a shift in focus towards revitalising South-east Asia’s largest economy amid signs of a slowdown.

The move, which marks the central bank’s first cut since its last reduction in September, sparked immediate pressure on the rupiah, which weakened against the US dollar.

The overnight deposit and lending facility rates were reduced to 5 per cent and 6.5 per cent, respectively.

BI’s decision stands in stark contrast to street expectations. A Bloomberg poll showed 38 economists expecting the central bank to hold rates steady to prevent further depreciation of the Indonesian currency.

BI governor Perry Warjiyo said the decision was driven by the need to stimulate growth in Indonesia’s economy, after fourth-quarter data revealed signs of a slowdown in the year ahead.

The central bank also revised its 2025 gross domestic product growth forecast downward to a range of 4.7 to 5.2 per cent, from 4.8 to 5.2 per cent previously.

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“This is the right time to lower interest rates to build a stronger growth story,” Warjiyo told reporters at a briefing. He added that the decision aligned with expectations of low inflation in 2025 and 2026.

Inflation in Indonesia has remained subdued, with December’s annual rate of 1.57 per cent hovering near the lower end of BI’s target range of 1.5 to 3.5 per cent.

Warjiyo said that the central bank is monitoring the possibility of further rate cuts this year, but emphasised that the timing will depend on global dynamics – particularly the policy direction under US president-elect Donald Trump, who is set to be inaugurated on Jan 20.

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“The past few months were filled with significant uncertainties. While uncertainties still linger this month, we are now in a position to measure them,” Warjiyo said when asked about the rate-cut decision amid pressure on the rupiah.

Rupiah weakness

David Sumual, senior economist at Bank Central Asia, noted that low inflation gave BI the opportunity to boost economic growth through a rate cut, even if it meant eroding the Indonesian currency.

Brian Lee, an economist at Maybank, called BI’s rate cut a surprise. He had expected the central bank to keep rates steady due to the rupiah’s weakness, despite a full-year forecast for a cumulative 75-basis-point reduction.

“BI looks to have become more concerned about Indonesia’s growth outlook, given lacklustre domestic consumption and uncertainty on the global economic environment stemming from Trump’s tariff threats,” he said.

“As a result, the central bank seems willing to tolerate some rupiah softness and opted to front-load monetary policy support.”

The rupiah plunged past the 16,314 rupiah per US dollar mark after Warjiyo unveiled the rate-cut decision.

Like many emerging markets, Indonesia has felt the sting of rising US yields and the dollar’s surge, tightening financial conditions and restricting the central bank’s capacity to ease monetary policy.

As at mid-January, the rupiah has weakened by 1 per cent against the US dollar, compared with levels at the close of 2024.

Radhika Rao, senior economist at DBS, said that BI is likely to use a triple intervention strategy to defend the rupiah.

This includes attracting more inflows through its monetary instrument – the rupiah securities (SRBI) window – as well as revamped instruments with extension of tenor aimed at drawing in foreign-exchange earnings from exporters, she said.

As at Jan 14, BI has issued SRBI totalling 914.72 trillion rupiah (S$77 billion) to attract foreign portfolio inflows and prevent further rupiah depreciation.