Indonesia Unexpectedly Cuts Key Interest Rate To Boost Economic Growth

(RTTNews) - Indonesia's central bank unexpectedly lowered interest rates for the first time in five policy sessions, in a bid to boost the economic growth, citing the prospect of lower inflation this year and next.

The Bank Indonesia Board, led by Governor Perry Warjiyo, cut the BI rate by 25 basis points to 5.75 percent on Wednesday. Economists had expected the bank to leave the rate unchanged.

This was the first rate cut since September 2024 and the BI rate is now at its lowest level since September 2023. The deposit facility rate and the lending rate were lowered by similar volume to 5.00 percent and 6.50 percent, respectively.

"This decision is consistent with the low inflation forecast for 2025 and 2026 which is controlled within the target of 2.5±1%, the maintenance of the Rupiah exchange rate in accordance with the fundamentals to control inflation within its target, and the need for efforts to help drive economic growth," the bank said.

The central bank lowered the growth projection for this year owing to less demand for the country's exports, weaker household consumption and lower investments. The bank estimated 2024 economic growth to be slightly below the midpoint of the range of 4.7 - 5.5 percent. Economic growth this year is projected to remain within this range, which is lower than the previous forecast range of 4.8-5.6 percent.

Inflation remained within the bank's target range of 2.5±1 percent in 2024 and is expected to continue at those levels this year.

Headline inflation rose marginally in December to 1.57 percent from a three-year low of 1.55 percent in November.

Capital Economics economist described the latest rate cut as a "major surprise".

"The reason we had expected rates to be left unchanged is the recent weakness of the rupiah, which has fallen back by nearly 7 percent against the US dollar since the end of September against the backdrop of a strong US economy and uncertainty over Trump's economic policies," Leather said.

"Governor Warjiyo gave no reason for the sudden change in approach, and the timing seems especially odd given policymakers have recently been rolling out more measures to support the currency."