Indonesia Surprises Markets with Interest Rate Cut Amid Currency Pressure

Indonesia’s central bank, Bank Indonesia (BI), unexpectedly reduced its benchmark 7-day reverse repurchase rate by 25 basis points to 5.75% on Wednesday, signaling a return to monetary easing. This marks the first cut since September, aimed at bolstering Southeast Asia’s largest economy despite ongoing currency volatility.

The decision surprised economists, as all 30 polled by Reuters predicted no rate change due to concerns over the rupiah. Alongside the benchmark cut, BI lowered its deposit and lending facility rates by 25 basis points to 5.00% and 6.50%, respectively.

BI Governor Perry Warjiyo stated that the rate cut aligns with expectations of low inflation in 2025 and 2026. He emphasized the need to balance inflation control with supporting economic growth, noting BI’s focus on maintaining the exchange rate within fundamentals.

Economic growth forecasts for 2024 and 2025 were slightly downgraded, with BI predicting growth between 4.7%-5.5% for both years. This is a reduction from the previous 2025 range of 4.8%-5.6%.

Following the announcement, the rupiah weakened to 16,325 per dollar, its lowest level since July, while the benchmark stock index gained 1.5%. Despite currency challenges, Warjiyo highlighted reduced uncertainties and confidence in measured policy adjustments.

Inflation remains moderate, with December’s annual rate at 1.57%, near the lower end of BI’s 1.5%-3.5% target. The central bank’s rate cut reflects its priority to stimulate growth while addressing financial market volatility.

This unexpected move demonstrates BI’s commitment to supporting economic recovery amid global uncertainties, balancing domestic stability with growth-oriented policies.