(Bloomberg) — Indonesia unexpectedly reduced its key interest rate in its first monetary policy decision this year, moving to bolster economic growth even after the local currency recently weakened beyond the key level of 16,000 to the dollar.
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Bank Indonesia lowered the benchmark BI-Rate by 25 basis points to 5.75% on Wednesday, a move that none of the economists surveyed by Bloomberg News predicted. All 38 analysts expected the central bank to leave policy unchanged at 6% for a fourth straight meeting.
The decision was a surprise after the rupiah declined almost 2% against the greenback in the past month, despite repeated central bank intervention. Governor Perry Warjiyo in December 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.
Wednesday’s cut signals that Warjiyo and his board have shifted their focus on supporting growth, which President Prabowo Subianto aims to accelerate to 8%, well above the 5% average pace of the past decade.
The central bank lowered estimates for Indonesia’s gross domestic product growth in 2024 and 2025 while slightly raising its projection for global expansion this year, according to Warjiyo’s remarks at the briefing. Authorities expect the rupiah to remain stable in line with BI’s policies and amid inflation that’s seen staying within target.
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.
But pressure on the rupiah led most economists to expect the central bank would hold, even though the nation’s inflation rate stood at the low end of BI’s 1.5%-3.5% target last year.
For now, Bank Indonesia may have to rely more on market intervention and on its high-yielding SRBI rupiah securities to attract foreign funds and stem rupiah volatility. Foreign exchange reserves surged to a fresh record last month, while average yields on SRBI were above 7% at the latest auction.
–With assistance from Norman Harsono.
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