Indonesia’s central bank decided on Wednesday (Sept. 18) to cut its interest rate by 25 bps to 6%, marking the first such move since early 2021. Only three out of 33 economists polled by Reuters had forecast a cut, while the others had expected Bank Indonesia (BI) to keep rates unchanged.
The overnight deposit facility and lending facility rates were also lowered by a quarter point to 5.25% and 6.75%, respectively.
“The Federal Funds Rate direction is getting clearer, and the rupiah is relatively stable and even getting stronger,” Bank Indonesia Governor Perry Warjiyo said.“These two factors are the reason why we lowered the interest rate right now,” he said.
The Rupiah appreciated to IDR 15,330 per USD (as of Sept. 17, 2024), reflecting a 0.78% increase from the end of August and outperforming regional currencies such as the Korean Won and Indian Rupee.
The headline inflation rate remained comfortably within the target range, edging down to 2.12% in August 2024 from 2.13% in July, marking its lowest level since February 2022.
The central bank of Southeast Asia’s largest economy has nothing to worry about on the inflation front, Capital Economics’ economist Gareth Leather said.
Moreover, with the US Federal Reserve cutting rates and with further reductions likely over the coming year, the rupiah is expected to continue to appreciate against the US dollar, the economist added.
Later on Wednesday the U.S. central bank announced a larger-than-usual 50 basis point reduction in borrowing costs and signaled further easing in the months ahead.
Quarterly projections also released Wednesday indicated median Fed staff forecasts call for another 50 basis points worth of cuts this year and a further 100 basis points in 2025, bringing the target range down to 4.25% to 4.5% and 3% to 3.25%, respectively.
