Indonesia’s CB delivers its first rate cut in more than three years

Indonesia’s central bank delivered its first rate cut in more than three years on Wednesday, just hours ahead of the widely expected start of the US Federal Reserve’s easing cycle in efforts to bolster growth in Southeast Asia’s largest economy.

Bank Indonesia (BI) unexpectedly trimmed the benchmark rate by 25 basis points to 6.00 per cent, its first rate cut since February 2021.

Only three out of 33 economists polled by Reuters had predicted the move, while the rest expected no change.

The decision is consistent with BI’s expectation inflation will remain low in 2024 and 2025, and the rupiah staying stable, BI governor Perry Warjiyo said. It also aligns with BI’s efforts to bolster economic growth, he added.

A clearer direction on monetary policy moves by the Fed, a bigger drop in US Treasury yields and tendency for the dollar to ease have given BI the window for the rate cut, he said.

“These three factors were very different from last month...so we did not have to wait for the Fed funds rate decision,” Warjiyo said. “The time is right,” he said. BI will continue to assess room for further easing, the governor said.

BI’s monetary policy stance is now a balance between stability and growth, Warjiyo said, switching from its previous “pro-stability” stance.

The rupiah had been under pressure earlier this year in response to changing risk appetite in global financial markets, but has since reversed those losses against the US dollar to be trading slightly firmer than last year’s close.

The main stock index is also up 7.8 per cent so far this year in a sign of returning capital inflows.

“Recent rupiah gains and markets pricing in a near certain cut by the US Fed, likely offered BI the headroom to kick-start the easing cycle earlier,” said DBS Bank economist Radhika Rao. “For now, we expect one more rate cut by end year.”

The currency briefly weakened after BI’s announcement, but regained its losses to stand at 15,330 per dollar by market close.

Warjiyo said BI will continue using its monetary operation instruments to attract capital inflows, as well as conduct market intervention when necessary to support the rupiah.

Inflation returned to within BI’s target range in mid-2023 and has remained there since. The inflation rate in August of 2.12 per cent was the lowest annual rate since February 2022.

The central bank maintained the 2024 GDP growth forecast at 5.1 per cent, the midpoint of its 4.7 per cent to 5.5 per cent range, but growth in 2025 may be higher than the midpoint of its 4.8 per cent per cent to 5.6 per cent outlook range, Warjiyo said.

These forecasts, Warjiyo said, suggested the economy was doing well, but it needed further stimulus to grow even faster. BI said among factors for the rate cut was that it would help fiscal financing by lowering bond yields.

On Tuesday, a parliamentary budget committee approved a 6 per cent rise in spending for the incoming government of President-elect Prabowo Subianto, who is set to take office next month.

Capital Economics’ Gareth Leather said inflation is unlikely to emerge as a concern for BI anytime soon, giving the central bank room to further cut rates.

The consultancy has revised its outlook for BI’s end-2024 benchmark rate to 5.50 per cent, from 5.75 per cent previously, in light of Wednesday’s cut and BI’s dovish commentary, Leather said.

Meanwhile Britain on Wednesday signed a memorandum of understanding to collaborate on critical minerals with Indonesia, home to some of the world’s largest mineral resources, the UK’s embassy in Jakarta said.

The agreement will support policy dialogue, sharing of technical knowledge and expertise and cover areas like supply chain resilience, sustainable upstream and downstream processing, and mineral criticality, it said in a statement, which did not prove specific details.

The partnership “puts both countries as key players in the critical minerals supply chain,” Britain’s development minister Anneliese Dodds said in the statement after signing the deal with Indonesia’s energy minister.

Indonesia has rich deposits of tin, copper and bauxite, among others, and is the world’s largest source of nickel ore. It is seeking to extract more value from the mineral by attracting investment into its processing and in the manufacturing of electric vehicle batteries.

The announcement comes two months after the United States said it had approached Indonesia about joining a multinational critical mineral partnership aimed at accelerating development of sustainable critical minerals supply chains.

Indonesia has massively expanded its nickel processing sector since it banned exports of unprocessed ore in 2020, but environmentalists have blamed the industry for deforestation, and water and air pollution caused by smelters.