Indonesia’s central bank delivers surprise 25 bps rate cut

[JAKARTA] Bank Indonesia (BI) unexpectedly cut its benchmark interest rate on Wednesday (Sep 18), marking its first reduction since February 2021.

The central bank lowered the rate by 25 basis points (bps) to 6 per cent, confounding analysts who did not expect it to move preemptively ahead of the US Federal Reserves.

It also cut the overnight deposit facility and lending facility rates to 5.25 per cent and 6.75 per cent, respectively.

The central bank’s decision to lower interest rates came in anticipation of the upcoming US Federal Reserve meeting, where a similar rate cut is widely expected.

“It is quite likely BI’s focus has now shifted from anchoring financial stability to supporting economic growth,” says Enrico Tanuwidjaja, Asean economist at UOB.

During the previous August meeting, BI governor Perry Warjiyo might have indicated a possible rate cut in October or after the Fed’s decision, but his track record suggests he could be data-driven and act decisively to surprise the markets, according to Satria Sambijantoro, head of research at Bahana Securities.

“The BI governor is a pragmatist with a tendency to act ahead of the curve,” Sambijantoro says.

Warjiyo noted that the central bank’s decision to lower rates was partly influenced by the increasingly clear trajectory of US monetary policy, with two 25 bps cuts expected later this year.

By acting before the Fed, Warjiyo said BI, which is primarily tasked with ensuring rupiah stability, aims to preserve financial stability and manage capital flows.

“I guess the time is right,” he said in a press briefing.

Inflation has eased comfortably within the central bank’s 1.5 to 3.5 per cent target range for this year, allowing policymakers greater flexibility to reduce the BI rate, which is currently at its highest level since its introduction in 2016.

The rupiah’s strong rally, which saw a 7 per cent surge in September, has emboldened the central bank to act ahead of the Fed, confident that it can do so without risking capital outflows or exacerbating inflationary pressures.

Amid shifting risk appetites in global financial markets, Indonesia attracted US$10.1 billion in foreign capital during the third quarter, with investors flocking to government bonds.

This strong influx of capital has driven the country’s foreign exchange reserves to a record high of US$150.2 billion as at the end of August.

The rupiah weakened slightly to 15,355 per US dollar soon after BI’s announcement, from 15,345 before.

However, Warjiyo expected the rupiah to strengthen further as the central bank continues to deploy its tools to support the currency and keep inflation within target.

UOB’s Tanuwidjaja anticipates that the central bank will implement another rate cut at a meeting in the near future, marking the beginning of a new easing cycle.

Lavanya Venkateswaran, senior Asean economist at OCBC, expects a more balanced approach from BI in the coming months, focusing on both economic growth and rupiah stability.

“We project one more 25 bps rate cut this year, with an additional cumulative reduction of 75 bps in 2025. However, there’s a potential risk that BI could accelerate rate cuts in the fourth quarter of 2024, leading to a more extensive cutting cycle than our current forecast of a total reduction of 125 bps.”

The rate cut by BI comes as the Indonesian government aims to achieve 5.2 per cent economic growth this year, amid weakening purchasing power among its 280 million people.

Although Indonesia’s economic outlook remains robust this quarter, with BI maintaining its gross domestic product growth forecast at 4.7 to 5.5 per cent for the year, Warjiyo emphasised the need for continued support for domestic economic activity.

Looking ahead, he said a range of measures must be implemented to drive higher economic growth, addressing both demand and supply factors.

The central bank noted that loans grew 11.4 per cent year on year in August, marking the slowest pace in six months.