Bank Indonesia (BI) is anticipated to cut interest rates twice more in the current year following an unexpected reduction on September 18, according to a Reuters poll of economists. The rationale behind this forecast is a stronger rupiah and subdued inflation, which provide the central bank the latitude to concentrate on fostering economic growth.
On the same day that the U.S. Federal Reserve implemented a 50 basis point policy rate cut last week, BI Governor Perry Warjiyo indicated a shift in policy focus from stabilizing the rupiah to balancing currency stability with economic growth.
Warjiyo stated that the Fed’s clearer stance on monetary policy provided BI with a conducive environment to lower rates.
With multiple U.S. rate cuts anticipated, further BI reductions are expected with reduced concerns about adverse impacts on the currency, according to economists.
In a Reuters poll conducted from September 19 to 24, over half of the economists surveyed—11 out of 21—projected that the central bank would reduce its benchmark seven-day reverse repurchase rate by 25 basis points to 5.75% at its October meeting. The remaining 10 economists anticipated no change from the current 6.00%.
Median forecasts suggested another 25-basis-point reduction in either November or December, which would bring the key rate to 5.50% by the end of the year.
The Fed is also expected to make an additional 25 basis point cut in both November and December, as per a snap Reuters poll conducted on Friday.
Kunal Kundu, an economist at Societe Generale and one of the few analysts who accurately predicted the recent BI rate cut, commented that “Now that the Fed has signaled a rather dovish pivot with a 50bp rate cut, BI has been afforded the luxury of allowing itself to be more inward-looking and calibrating its monetary policy to support growth.”
While BI maintained its 2024 gross domestic product (GDP) growth forecast at 5.1%, which is at the midpoint of its preferred 4.7% to 5.5% range, it emphasized the necessity for policy measures to spur economic growth.
Median projections indicated that rates would fall to 5.00% by the end of 2025, which is 25 basis points lower than the previous poll and 100 basis points lower than current levels.
The Fed, according to the latest poll, is anticipated to cut rates by 150 basis points over the same period.
BI is likely to adopt a slightly less aggressive easing cycle compared to the Fed to maintain the attractiveness of its currency, as per economists.
Jeemin Bang, an associate economist at Moody’s Analytics, commented, “As the U.S. Federal Reserve reduces interest rates more rapidly than Bank Indonesia, foreign investors may increasingly look towards Indonesia for favorable returns.”
