Monetary shift: A teller counts rupiah banknotes in Jakarta. The currency’s exchange rate is generally prone to volatility in times of global economic turbulence. — Reuters
JAKARTA: Bank Indonesia (BI) has cut its benchmark interest rate by 25 basis points (bps) in an effort to boost economic growth while inflation is under control.
Following the central bank’s two-day monthly policy meeting, BI governor Perry Warjiyo announced at a press conference in Jakarta on Wednesday that the key interest rate, the BI Rate, would be cut to 5.5% from 5.75%.
The move is the second reduction so far this year after the monetary policy authority also reduced the BI rate by 25 bps in January.
Perry said the loosening measure was taken to “push sustainable economic growth”.
Indonesia’s gross domestic product (GDP) only grew by 4.87% year-on-year (y-o-y) in this year’s first quarter, which marked a slowdown from the 5.02% y-o-y growth attained in the preceding quarter, the most sluggish growth since the pandemic.
Perry announced that the central bank revised its GDP growth forecast for 2025 to a range of 4.6% to 5.4%, down marginally from its initial estimate of 4.7% to 5.5%.
The governor said the BI rate cut was possible as inflation remained low and the rupiah’s exchange rate against the United States dollar remained “stable”.
Inflation has been sitting well within BI’s target range of 2.5, plus/minus 1%, throughout 2024 and even dipped below the floor in the first three months of this year, but bounced back to 1.95% in April.
The rupiah’s exchange rate is generally prone to volatility in times of global economic turbulence.
The currency has been on a downward trend against the greenback since September of last year as the global economy has been clouded by geopolitical and geoeconomic tensions.
The rupiah briefly breached the psychological threshold of 17,000 rupiah per dollar on April 8 and flirted with the historic low of 17,300 rupiah recorded amid the Asian Financial Crisis in 1998.
April 8 was the day before the White House imposed so-called “reciprocal” tariffs against imports from dozens of countries, including Indonesia, marking the beginning of global trade tensions initiated by US President Donald Trump in a bid to force global corporations to move factories to the United States.
China is the main target of Washington’s tariffs and other trade and investment restrictions, but the trade war between the world’s two largest economies died down somewhat as the United States last week reached a temporary agreement with Beijing to significantly reduce the triple-digit tariff rates they had imposed on each other’s exports for 90 days.
Investors interpreted the deal as a signal that Trump would not go on with his plan of imposing exorbitant import duties also on dozens of other countries, which would significantly stunt global economic growth.
As a result, global risk appetite has increased again, meaning more capital would flow into emerging markets like Indonesia, strengthening the rupiah in the process.
Regaining its footing at the start of this month, the Indonesian currency has since changed hands at around 16,500 rupiah per dollar, a value Perry said “reflected” the country’s fundamentals.
However, he noted that the deal between Beijing and Washington was “still temporary”, meaning risks were still lurking.
Another factor supporting BI’s cut was its assessment that the US Federal Reserve will slash its federal funds rate (FFR) twice this year, which Perry said is likely to happen in September and December.
CME Group’s FedWatch Tool shows that the majority of interest rate traders believe the US central bank will cut its rate by 25 bps in September and by the same amount in December.
Bank Permata chief economist Josua Pardede wrote in an analysis on Wednesday that the central bank would “gradually shift its focus from pro-stability to pro-growth”.
By law, the central bank is mandated to ensure rupiah stability as well as a monetary policy environment that supports business activity.
“On the domestic front, rising concerns over Indonesia’s slowing GDP growth may create room for further monetary easing,” said Josua.
He argued that BI “still had room” to cut by another 25 bps in the second half.
Fithra Faisal Hastiadi, an economist at SSI Research, recommended BI keep the benchmark rate unchanged until the second half “to assess the durability of global financial stability following the temporary suspension of US tariffs”.
“From a risk management standpoint, holding the rate would have allowed BI more time to evaluate potential spillovers from external uncertainties,” said Fithra in an analysis on Wednesday.
He explained that the scope for further policy easing by BI would particularly depend on the trajectory of the FFR, China’s growth performance and geopolitical uncertainties.
Domestically, the decision would depend on inflation, currency stability and “private sector recovery”. — The Jakarta Post/ANN
