By Gayatri Suroyo and Stefanno Sulaiman
JAKARTA (Reuters) – Indonesia’s central bank unexpectedly cut interest rates on Wednesday, continuing monetary easing to support growth in Southeast Asia’s biggest economy despite financial market volatility that has sharply weakened the rupiah.
Bank Indonesia (BI) cut its benchmark 7-day reverse repo rate by 25 basis points to 5.75%, the first cut since September. The benchmark is now at its lowest in more than a year.
All 30 economists polled by Reuters expected no rate changes, citing pressure on the rupee as the US dollar rises. Traders believe the central bank has been selling dollars for weeks to slow the decline in the local currency.
The bank also reduced its interest rate on deposits and loans by 25 basis points to 5.00% and 6.50%, respectively.
“This is the time to cut rates so we can create a better growth story,” BI Governor Perry Warjiyo said after announcing the surprise cut.
BI will “monitor scope for further support to economic growth,” he said, hinting that the central bank may take more measures to stimulate the economy.
The main factor behind the cut was signs of weaker-than-expected economic growth in the last quarter of 2024, Warjiyo said, adding that the outlook for low inflation until 2026 provided room for policy easing.
While uncertainties about US monetary policy remained, BI could better assess the impact on Indonesia’s economy, he said.
Economic growth in 2024 is expected to be slightly below the middle of BI’s forecast range of 4.7%-5.5%, the bank said, revising down its growth outlook for 2025 to 4.7%-5. 5% from the previous 4.8%-5.6%, due to expectations of weaker household consumption and weaker exports.
The central bank cut interest rates for the first time in more than three years in September, but then held policy steady at subsequent meetings to shore up the rupee, which has been under pressure from uncertainty over US policy under President-elect Donald Trump.
The rupee fell to a six-month low of 16,335 per dollar after the rate cut, while the benchmark stock index rallied to rise 1.8% as of 0850 GMT.
“What was our main concern was global uncertainty and its impact on the exchange rate,” the governor said.
“We have estimated that the current exchange rate is relatively stable and in line with the fundamental value going forward,” he added.
Inflation in Indonesia was moderate, with December’s annual rate of 1.57% near the lower end of BI’s target range of 1.5% to 3.5%.
Radhika Rao, an economist at DBS, said the surprise decision signaled a shift in focus towards growth, which contrasted with BI’s previous more cautious comments on the currency.
However, the change could put more pressure on the rupee.
“It is clear that the BI is struggling with the twin objectives of supporting the economy and depreciating the rupiah. The decision to cut the exchange rate has inevitably put pressure on the rupiah, which will now be lagging,” said Lloyd Chan, currency analyst at MUFG Bank.
“A gradual tariff hike by the new Trump administration could lead to some reprieve for the rupee,” he said.
