Bank Indonesia Interest Rate Cuts

By Rahul Trivedi

BENGALURU (Reuters) – Bank Indonesia (BI) is expected to implement two more interest rate cuts this year after a surprising reduction on Sept. 18, according to a Reuters poll of economists. The recent strengthening of the rupiah and subdued inflation enables the central bank to prioritize growth.

BI Governor Perry Warjiyo hinted at a policy shift from maintaining the rupiah’s stability towards balancing it with economic growth, following the U.S. Federal Reserve’s recent 50-basis-point rate cut.

Warjiyo noted that the Fed’s clearer monetary policy direction opened up opportunities for BI to lower rates. With anticipated U.S. rate cuts, economists foresee further BI reductions without significant concerns about currency impact.

In a poll conducted from Sept. 19-24, over 50% of economists forecast a cut in the benchmark seven-day reverse repurchase rate by 25 basis points to 5.75% at the upcoming October meeting, while the remainder expect no change.

Median projections suggest another 25-basis-point rate cut either in November or December, ending the year at 5.50%. The Fed is also expected to reduce rates by another 25 basis points in the same months, according to a recent Reuters poll.

“With the Fed signaling a dovish pivot, BI has the luxury to focus inward and adjust its monetary policy to foster growth,” said Kunal Kundu, economist at Societe Generale.

While maintaining its 2024 GDP growth forecast at 5.1%, within a preferred range of 4.7% to 5.5%, BI highlighted the need for policy adjustments to spur economic development. Further forecasts till 2025 predict rates might decline to 5.00%, which is 25 basis points lower than earlier predictions.

Economists anticipate BI will engage in a slightly less aggressive easing cycle compared to the Fed to uphold the currency’s appeal. Jeemin Bang, an associate economist at Moody’s Analytics, stated that as the Fed cuts rates faster, foreign investors might increasingly consider Indonesia for better returns.