Indonesia Cuts Key Interest Rate Despite Currency Depreciation

In a move that surprised many market analysts, Bank Indonesia has lowered its benchmark interest rate by 25 basis points to 5.75%. The decision, comes as part of the central bank’s efforts to stimulate economic growth, despite concerns over the rupiah’s recent depreciation, which has seen the currency fall below the critical 16,000-per-dollar mark.

This move defied the consensus of 38 economists surveyed, all of whom had expected the central bank to maintain its policy rate at 6% for the fourth consecutive meeting. Following the announcement, the rupiah extended its losses by 0.4%, making it the weakest-performing currency in Asia for the day. However, Indonesian stocks gained as much as 1.4%, reflecting investor optimism in other areas of the economy. The yield on five-year government bonds also moderated after initially rising.

Governor Perry Warjiyo, speaking in Jakarta, explained that the rate cut was a shift in policy focus, aiming to balance both stability and growth. “We have changed our stance, which is to pro-stability and growth,” Warjiyo stated. “We continue to look at the room for interest rate cuts in line with global and national economic dynamics.”

Previously, in December, Warjiyo had emphasized maintaining currency stability due to external uncertainties such as the new U.S. administration and Federal Reserve policies. Despite this, the central bank’s decision now signals a broader focus on supporting domestic growth, in line with President Prabowo Subianto’s ambitious target of an 8% growth rate, well above the 5% average of the past decade.

The decision to cut rates comes despite the rupiah’s ongoing struggles, which have seen it decline by nearly 2% against the U.S. dollar in the past month, despite continued intervention by the central bank. Warjiyo stressed that the monetary policy decision aligned with the central bank’s goals of controlling inflation within the 1.5%-3.5% target range and maintaining the rupiah’s exchange rate relative to economic fundamentals.

In line with these goals, Bank Indonesia has revised its growth projections, downgrading Indonesia’s GDP growth outlook for 2025 while slightly raising its forecast for global economic expansion. Warjiyo also noted that the central bank would continue coordinating closely with the government to stimulate economic activity, particularly in support of President Subianto’s key programs.

In a related development, the Indonesian government made a surprise move on New Year’s Eve, scaling back its planned value-added tax rate hike while also unveiling a stimulus package aimed at boosting domestic demand.

Despite the ongoing pressure on the rupiah, many economists had anticipated that Bank Indonesia would keep its rate steady, given the low inflation rate, which remained at the lower end of the target range last year. As a result, analysts believe the central bank may increasingly rely on market interventions and the high-yielding SRBI rupiah securities to attract foreign investments and reduce currency volatility.

Bank Indonesia’s foreign exchange reserves reached a new record last month, and average yields on SRBI securities were reported above 7% at the latest auction. These measures suggest that the central bank is preparing to balance short-term currency pressures with longer-term growth goals.