Indonesia's Central Bank Kicks Off Easing Cycle — Update

By Ying Xian Wong

Bank Indonesia has joined the growing ranks of central banks in Asia that are lowering interest rates, delivering a cut on the cusp of a Federal Reserve meeting that could start the easing cycle in the U.S.

The Indonesian central bank cut its benchmark seven-day reverse repo rate by 25 basis points to 6.0% on Wednesday, defying expectations that it would keep policy settings steady for a fifth straight meeting.

The central bank also lowered its overnight deposit facility rate to 5.25% and its lending facility rate to 6.75%.

Five of seven economists polled by The Wall Street Journal had expected the BI to stay on hold, while the other two projected a rate cut. The central bank has been dropping hints about a rate reduction for some time, so long as inflation stays contained and the rupiah stable.

Bank Indonesia Gov. Perry Warjiyo highlighted several reasons for lowering the interest rate, including clarity over the Fed's policy direction.

The BI expects three 25-basis-point rate cuts from the Fed in 2024, followed by four cuts next year, he said at a press conference.

Warjiyo also cited a strengthening and stabilizing rupiah, low and controlled inflation, economic growth and fiscal financing as factors contributing to the decision to reduce rates. "The time is right," he said.

Moving forward, the BI will lower the policy rate in accordance with economic developments, Warjiyo said.

With the Fed likely to begin cutting interest rates later, and more cuts expected over the coming year, Capital Economics expects the rupiah to continue strengthening against the dollar.

Capital Economics forecasts Indonesia's policy rate to end the year at 5.5%, down from its previous estimate of 5.75%, senior Asia economist Gareth Leather said in a note.

The BI will likely balance its policy between maintaining growth and ensuring rupiah stability, Lavanya Venkateswaran, senior Asean economist at OCBC, said in a note. She expects another 25-basis-point rate reduction this year and 75 basis points of cuts in 2025.

Write to Ying Xian Wong at yingxian.wong@wsj.com

(END) Dow Jones Newswires

September 18, 2024 06:02 ET (10:02 GMT)

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