(Bloomberg) — Indonesia’s central bank unexpectedly cut its key interest rate for the first time in more than three years, as an imminent Federal Reserve pivot allowed it to ease ahead of its own guidance and turn its focus on supporting the economy.
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Bank Indonesia lowered the BI-Rate by a quarter-point to 6%, a decision seen by only 10 of 36 analysts in a Bloomberg News Survey, with the rest expecting a hold. Governor Perry Warjiyo signaled last month that BI would wait until the fourth quarter, when Fed cuts are underway.
“The time is right,” Warjiyo said in a briefing in Jakarta on Wednesday, adding that BI has room to help Southeast Asia’s largest economy achieve higher growth.
After rallying almost 7% this quarter, Indonesia’s currency is trading close to its strongest level versus the dollar in a year. That gave Warjiyo scope to act sooner rather than later, especially as it expects the Fed to deliver 25-basis points in cuts thrice this year and another four times in 2025, paving the way for a weaker dollar and more portfolio flows to emerging markets.
“Going forward, Bank Indonesia will continue to keep an eye on the room for lowering policy rate in line with low inflation forecast, the stable and appreciating rupiah, and the need to boost economic growth higher,” said Warjiyo when asked about the central bank’s likely easing path.
The rupiah all but erased an earlier loss to close little changed at 15,340 per dollar. The yield on five-year bonds fell one basis point to 6.43% to close at its lowest since February.
Tight financial conditions in Indonesia after 275 basis points of rate hikes in the past two years are starting to show in the economy, with indicators of consumer sentiment, hiring and manufacturing softening.
That’s prompted BI on Wednesday to shift from its “pro-stability” monetary policy — focused on supporting the rupiah — to a stance that’s “balanced between stability and growth.”
While Indonesia’s economic outlook remains solid this quarter, with BI keeping its gross domestic product growth estimate this year at a range of 4.7%-5.5%, Warjiyo said that domestic activity needs support. Various efforts need to be taken to push growth faster, both from the demand and supply sides, he said.
Lower rates will also support credit expansion and government financing, according to the governor. Loan growth stood at 11.4% year-on-year in August, the slowest pace in six months.
“This is unlikely to be a one-off given that BI is turning a little more pro-growth. BI didn’t have to wait for the Fed which speaks to greater confidence the external environment is clearly turning more supportive of sustained IDR stability,” said Euben Paracuelles, Nomura Holdings Inc. economist in Singapore.
A more accommodative BI policy stance would also help incoming leader Prabowo Subianto achieve his goal of ramping up growth to as high as 8% annually during his term. GDP growth can go higher than the 5.2% government forecast for 2025, Warjiyo said.
For BI, whose key mandate is to ensure currency stability, timing is key to avoid unsettling the rupiah’s gains. Inflation has cooled well within the central bank’s 1.5%-3.5% target this year, giving policymakers more scope to lower the BI-Rate from the highest since it was introduced in 2016.
Warjiyo expects the rupiah to strengthen further due to Indonesia’s attractive asset yields, low inflation and healthy economic growth. The currency also enjoys strong buffers amid record-high foreign exchange reserves and a narrow current-account deficit, he said.
To keep luring fund flows, BI will keep optimizing the volume and yield of its monetary instruments, including its rupiah- and dollar-denominated securities. Foreign ownership of its local currency notes has risen to 27% of the total outstanding 918.4 trillion rupiah ($59.9 billion).
What Bloomberg Economics Says…
Bank Indonesia’s pivot to rate cuts Wednesday — ahead of the imminent start of a Federal Reserve easing cycle — indicates it sees the recent recovery in the rupiah as sustainable. Its guidance that it will watch for room to make further cuts indicates it will likely mirror the Fed’s easing path in the remaining months of 2024.
— Tamara Mast Henderson, Asean economist
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Bank Indonesia, once it embarks on rate reductions, isn’t expected to aggressively cut as global risks remain elevated, including from the new US administration. The pace of US easing will also factor in future BI decisions, especially as the market is divided on whether the Fed will cut by 25 or 50 basis points later Wednesday.
Read: Fed to Kick Off Rate Cuts, Signal Next Steps
“The BI rate cut will not hurt the local currency, assuming the Fed indeed starts easing imminently too and the US doesn’t fall into a recession,” said Alvin Tan, head of Asia FX strategy at Royal Bank of Canada in Singapore. “In a positive global risk environment, the BI easing cycle will encourage foreign investors to buy more Indonesian government bonds, and hence buoy the rupiah in the process.”
–With assistance from Matthew Burgess, Ditas Lopez, Eko Listiyorini and Claire Jiao.
(Recasts throughout with more comments from BI governor, analysts.)
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