Indonesia: Central Bank unexpectedly cuts rates in September
Rater cuts start earlier than expected: At its meeting on 17–18 September, Bank Indonesia (BI) decided to lower the BI-Rate by 25 basis points to 6.00%, marking the first rate reduction since 2021. Similarly, it reduced the Deposit Facility rate and Lending Facility rate by 25 basis points to 5.25% and 6.75%, respectively. The move caught markets by surprise, which had instead anticipated a hold.
BI cuts due to rupiah appreciation, low inflation: The key domestic factors influencing the Central Bank’s decision included a more favorable outlook for the rupiah; the currency has recently rallied, and BI expects the exchange rate to receive further support ahead on the prospect of larger-than-anticipated Fed cuts. In addition, the Bank’s projections continued to see inflation within the 1.5–3.5% target corridor in 2024 and 2025, suggesting a benign outlook for prices. Lastly, BI’s move aimed to bolster economic growth, which the Bank said remains “solid” but requires demand-side stimulus to improve further.
Further rate reductions on the horizon: The Central Bank indicated its openness to future reductions in the policy rate, contingent upon sustained low inflation, rupiah stability and appreciation, and the need to strengthen economic growth. As a result, our panelists see between 25–75 basis points of additional rate cuts this year. BI is then seen gradually reducing the BI-Rate through 2025, with the pace and timing of the U.S. Fed’s monetary policy easing cycle a key factor to monitor due to its impact on exchange rates.
BI will convene next on 15–16 October.
Panelist insight: United Overseas Bank analyst Enrico Tanuwidjaja commented on the outlook:
“Today’s monetary policy decision by BI clearly has signaled its shift of focus from anchoring financial stability into supporting economic growth. Consequently, our view has now slightly shifted that BI will continue its rate cutting cycle next month in 4Q24 to 5.75%. In 2025, we expect a cumulative 100bps cuts for the BI rate to reach 4.75% by the end of next year.”
Nomura analysts commented on the risks to BI’s policy decisions ahead:
“We think BI will likely remain prudent, and the timing of the rate cuts might be flexible, depending largely on BI’s assessment of external risks and capital inflows. This is why we see a BI pause in November and December, reflecting some uncertainty from the US elections. The new government of President-elect Prabowo also officially takes over on 20 October and the transition might add to some uncertainty. If, however, capital inflows continue over this period […], then we think BI can deliver more cuts earlier with a measured approach.”