Indonesia's Central Bank Holds Key Rate Steady

By Rahul Trivedi
BENGALURU (Reuters) – Bank Indonesia (BI) will hold its key interest rate steady on Wednesday to support the rupiah, according to a narrow majority of economists in a Reuters poll. Just a month ago, they had decisively expected a rate cut on Dec. 18.

While domestic factors such as softening economic growth and cooling inflation favored a rate cut, the rupiah's near 6% drop against the dollar since a September peak was likely to give BI enough reason to pause. The central bank is mandated to keep the currency stable.

As per the Dec. 9-13 Reuters poll, just over 50% of respondents, 17 of 31, predicted that the BI would keep its benchmark seven-day reverse repurchase rate at 6.00% on Wednesday. Radhika Rao, senior economist at DBS Bank in Singapore, stated, "We expect BI to err on the side of caution and keep the benchmark rate on hold this month."

"While inflation and growth developments tick the box for the BI to retain a dovish bent, weakness in the currency is a bigger concern for policymakers due to U.S.-driven uncertainties."

However, a significant minority, 14 of 31, expected a quarter-point cut as Indonesian inflation was near the lower end of BI's 1.5-3.5% target range last month, and domestic consumption, the primary growth driver, moderated last quarter.

Median forecasts indicated that economists anticipate shallower interest rate cuts, down from 100 basis points in previous polls to 75 basis points by the end of 2025. This adjustment aligns with expectations of the U.S. Federal Reserve making three quarter-percentage point cuts next year.

Diminishing expectations for aggressive rate cuts from BI and the Fed were largely linked to proposed tariffs by U.S. President-elect Donald Trump, which are expected to create inflationary pressures in the U.S. economy, thus strengthening the dollar for an extended period.

An economist from ANZ noted, "While BI maintained an easing bias, it recognized that the scope for rate cuts has become more limited given U.S. political developments and the resulting prospects of higher U.S. inflation, treasury yields, and a stronger U.S. dollar."

(Other stories from the Reuters global economic poll)