Indonesia's central bank unexpectedly reduced its key interest rate for the first time in over three years, lowering the BI-Rate by a quarter-point to 6%. This surprise move, which was anticipated by only 10 of 36 economists in a Bloomberg News survey, marks a pivot toward supporting the country’s economic growth as the Federal Reserve gears up for its own policy changes.
Governor Perry Warjiyo emphasized the need to act now, stating, "The time is right" for Bank Indonesia (BI) to step in and boost growth. Warjiyo added that this decision will help Southeast Asia's largest economy achieve higher growth, especially as the central bank anticipates further rate cuts by the Federal Reserve.
The rupiah, which rallied nearly 7% this quarter, is trading close to its strongest level against the US dollar in a year, giving BI more flexibility to act sooner. The bank expects the Fed to cut rates by 25 basis points three times this year and another four times in 2025, contributing to a weaker dollar and increased capital flows to emerging markets like Indonesia.
As financial conditions tighten due to the 275 basis points of rate hikes in the past two years, Bank Indonesia has shifted its focus from "pro-stability" to a more balanced stance, aimed at both stability and growth. Warjiyo reiterated the need for additional efforts to accelerate growth from both the demand and supply sides.
Loan growth in Indonesia stood at 11.4% year-on-year in August, marking the slowest pace in six months, prompting the need for lower rates to support credit expansion and government financing.
Economists expect this rate cut to signal the start of a more pro-growth monetary policy, which would also support incoming leader Prabowo Subianto in his goal to push Indonesia's GDP growth as high as 8% during his term. Warjiyo noted that growth could exceed the government’s 5.2% forecast for 2025.
Warjiyo also highlighted the strength of the rupiah, driven by low inflation, attractive asset yields, and healthy economic growth. The central bank's foreign exchange reserves and a narrow current-account deficit provide strong buffers, making Indonesia a favorable destination for foreign investors.
Bank Indonesia’s pivot to rate cuts comes as global risks remain elevated, but the bank is expected to maintain a cautious approach, closely watching the Fed's easing cycle and broader global market conditions. Foreign investors are likely to respond positively, with increased demand for Indonesian government bonds further supporting the rupiah.
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