Indonesia’s central bank yesterday unexpectedly cut key interest rates for the first time in more than three years as the rupiah strengthens and ahead of an expected US Federal Reserve rate reduction later in the day.
Bank Indonesia lowered the seven-day reverse repurchase rate by 25 basis points to 6 percent, marking the first such move since early 2021. Its two other main rates were also cut by 25 basis points.
“The Federal Funds Rate direction is getting clearer, and the rupiah is relatively stable and even getting stronger,” Bank Indonesia Governor Perry Warjiyo said.
Photo: Bloomberg
“These two factors are the reason why we lowered the interest rate right now,” he said.
The Indonesian central bank had steadily increased borrowing costs to defend the rupiah amid growing global economic uncertainty and rising inflation.
However, with price rises slowing, Warjiyo said the decision to cut was consistent with the bank’s prediction that inflation would remain low this year and next.
After rallying almost 7 percent this quarter, Indonesia’s currency is trading close to its strongest level versus the US dollar in a year, thanks in large part to a likely Fed cut, and low and stable domestic inflation. That gave Warjiyo scope to act sooner rather than later — especially as a more aggressive cut from the Fed would risk further rupiah gains versus the US dollar.
Tight financial conditions after 275 basis points of Bank Indonesia’s rate hikes in the past two years are also starting to show in Southeast Asia’s largest economy, Bloomberg Economics’ Tamara Henderson and Andrej Sokol said in a note this week, supporting calls for an early rate cut.
While Indonesia’s economic outlook remains solid this quarter, with the central bank keeping its GDP growth estimate this year at a range of 4.7 percent to 5.5 percent, Warjiyo said that domestic activity needs to be supported.
Additional reporting by Bloomberg
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