Indonesia’s Central Bank Unexpectedly Cuts Interest Rates to Boost Growth

In a surprising move, Indonesia’s central bank has cut its key interest rate for the first time this year, despite the Indonesian rupiah recently falling below the critical threshold of 16,000 against the US dollar. The bank reduced the benchmark rate by 25 basis points to 5.75%, a decision that none of the 38 surveyed economists had anticipated, as they expected the rate to remain steady at 6% for the fourth consecutive time.

Despite repeated interventions by the central bank, the rupiah has depreciated nearly 2% against the dollar over the past month, making the rate cut unexpected. In December, Governor Perry Warjiyo emphasized that monetary policy would focus on maintaining exchange rate stability, citing uncertainties from the incoming Trump administration, the Federal Reserve’s policy direction, and geopolitical tensions.

Following the rate decision, the rupiah weakened, while Indonesian stocks saw gains. The dollar rose 0.4% against the rupiah, reaching 16,334, and the Indonesian stock market’s gains widened to 1.2%. Additionally, the yield on Indonesia’s five-year government bonds fell by 2 basis points to 7.14%.

This rate cut indicates that Warjiyo and the central bank’s policy committee are now prioritizing economic growth. President Prabowo Subianto aims to boost the country’s economic growth rate to 8%, significantly higher than the 5% average over the past decade.