Big Monetary Surprise! Bank Indonesia Cut Its Benchmark Interest Rate
The central bank of Indonesia (Bank Indonesia) made a surprising move on Wednesday (15 January 2025) by cutting its benchmark interest rate by 25 basis points (bps) to 5.75 percent.
Besides Bank Indonesia lowering its benchmark BI-Rate to 5.75 percent, it also cut the deposit facility rate and lending facility rate by 25 bps to 5.00 percent and 6.50 percent, respectively. Bank Indonesia stated that this decision is consistent with the outlook for low inflation in Indonesia in 2025 and 2026 (in the range of 1.5 - 3.5 percent), while maintaining the rupiah exchange rate in line with economic fundamentals, and is in line with the need to bolster economic growth.
The decision to cut interest rates was a big surprise. Essentially all analysts expected Bank Indonesia to keep its key interest rate at 5.75 percent amid the still high degree of international uncertainties related to the monetary policy of the US Federal Reserve (which has trouble cutting rates amid persistently high US inflation), the policies of the incoming Donald Trump administration (which could affect global trade), the Russo-Ukrainian war, and the Israel-Hamas war (although there seems to be a ceasefire agreement between Israel and Hamas on the agenda, which does ease concern to a certain extent).
The main reason why the rate cut is a surprise is that the Indonesian rupiah has been under quite some pressure amid global turmoil. Typically, a rate cut by the central bank is negative for the currency but positive for shares (as it becomes more affordable for listed companies to borrow funds for the purpose of business expansion) and is positive for the national economy (as lower borrowing costs stimulate more economic activity).
Considering Bank Indonesia Governor Perry Warjiyo has shown he is an advocate for prudent monetary policies over the years, this rate cut is a big surprise as it is bound to drag the value of rupiah down. One could even speculate whether there has been some interference from the central government to push for this rate cut in an attempt to boost national economic growth.
Bank Indonesia has two objectives: (1) maintain low and stable inflation, and (2) maintain currency stability (in line with the currency's fundamentals). Indonesia's headline inflation is very comfortable at 1.57 percent year-on-year (y/y) at the end of 2024, but the rupiah has been under pressure, weakening from around USD $15,100 per US dollar in late-September 2024 to USD 16,315 per US dollar on 15 January 2025.