Indonesia Surprises With Rate Cut, Intervenes in FX Market
(Bloomberg) -- Indonesia defied market expectations by cutting its key interest rate, moving to bolster economic growth even after the local currency’s recent slide beyond the key level of 16,000 to the dollar.
Bank Indonesia lowered the benchmark BI-Rate by 25 basis points to 5.75% on Wednesday. The 38 economists surveyed by Bloomberg News unanimously expected the central bank to leave policy unchanged at 6% for a fourth straight meeting.
The rupiah extended its loss against the dollar to 0.4% after the decision, before closing 0.3% weaker after the central bank intervened to support the currency, Asia’s worst performer. Indonesian stocks gained as much as 1.8% and policy-sensitive bonds rallied, with the yield on five-year notes tumbling nine basis points to 7.07%, the biggest move in more than two months.
“We have changed our stance, which is to pro-stability and growth,” Governor Perry Warjiyo said at a briefing in Jakarta on Wednesday, adding that the shift came when policymakers pivoted to easing in September. “And we have said that we continue to look at the room for interest rate cuts in line with global and national economic dynamics.”
In December, Warjiyo had reiterated that monetary policy would be focused on maintaining currency stability, citing uncertainty over incoming US President Donald Trump’s administration, the Federal Reserve’s easing path, and geopolitical tensions.
The decision is consistent with forecast that inflation will stay low and within the 1.5% to 3.5% target this year and next, a stable exchange rate in line with fundamentals “and the need to contribute to economic growth,” Warjiyo said at the briefing.
The rupiah has declined about 2% against the greenback in the past month, despite repeated intervention by the central bank. Edi Susianto, the central bank’s director for monetary and asset securities management, on Wednesday afternoon confirmed it was again in the market.
The latest rate cut signals that Warjiyo and his board have shifted their focus to supporting growth, which President Prabowo Subianto aims to accelerate to 8%, well above the 5% average pace of the past decade.
The central bank pared its estimate for gross domestic product growth in 2025 to a range of 4.7% to 5.5% from 4.8% to 5.6%, warning of softer consumption, employment, investment and exports, despite becoming slightly more optimistic on the global outlook.
The decision to lower borrowing costs should encourage banks to lend to productive and labor-intensive sectors, Warjiyo said at the briefing. Bank Indonesia will keep coordinating with the government to spur economic activity, in line with the president’s priority programs, he added.
On New Year’s Eve, the government surprisingly scaled back its value-added tax rate hike this year while pushing through with a stimulus package, which includes fiscal measures to boost domestic demand.
“This will put more depreciation pressure on the rupiah,” said Lloyd Chan, an FX strategist at MUFG Bank Ltd. “The decision today clearly shows that policymakers are grappling with the need to support growth on one hand while stabilizing the rupiah.”
Bank Indonesia expressed optimism the currency would keep steady, citing the country’s fundamentals and attractive yields. Greater clarity around Trump and the Fed’s policy direction should help temper global volatility, Warjiyo said.
In recent weeks, policymakers have bolstered efforts to prop up the rupiah, ahead of Trump’s presidency. Bank Indonesia has been offering hefty premiums on its rupiah securities to lure more foreign inflows, while a senior minister also signaled plans to lengthen the lock-up period for exporters’ dollar earnings to one year from three months currently.
“Governor Warjiyo gave no reason for the sudden change in approach, and the timing seems especially odd given policymakers have recently been rolling out more measures to support the currency,” Gareth Leather, senior economist at Capital Economics said in a note, after the surprise decision.
--With assistance from Norman Harsono, Claire Jiao and Matthew Burgess.
(Updates with market reaction, more details from briefing.)