Indonesia central bank makes another surprise rate cut; independence concerns grow

JAKARTA - Indonesia’s central bank delivered another surprise interest rate cut on Sept 17, aiming to bolster economic growth even as investors’ concerns grow over the country’s fiscal discipline.

Bank Indonesia (BI) trimmed the benchmark seven-day reverse repurchase rate by 25 basis points to 4.75 per cent, its sixth cut since it kicked off an easing cycle in September 2024 and taking borrowing costs to the lowest since late 2022.

All 31 economists surveyed by Reuters had expected no change after a cut in July and an unexpected easing in August.

Governor Perry Warjiyo said the central bank would continue to assess room for further cuts, underscoring economists’ expectations for more monetary loosening.

BI has had to balance the need to keep the rupiah currency stable while supporting economic growth during the easing cycle, Mr Warjiyo said.

“Our economic growth is still below the national capacity, so demand needs to be pushed,” Mr Warjiyo told an online press conference, adding BI has been going “all out” to support economic growth while maintaining financial market stability.

Indonesia’s stock market hit a record high after the decision, while the rupiah firmed slightly.

The rupiah is one of emerging Asia’s worst performing currencies so far in 2025.

It has dropped 2 per cent against the US dollar, with concerns over Indonesia’s domestic finances and central bank independence offsetting broader global weakness in the greenback that has buoyed many other emerging market currencies.

Financial markets also have been unsettled by two weeks of protests and unrest in many cities from late August, and by last week’s abrupt sacking of respected finance minister Sri Mulyani Indrawati.

There have been concerns about the central bank’s independence following a “burden sharing” deal that will see BI help fund state programmes.

Parliament is discussing changes to an existing Bill that could strengthen the requirement of the central bank to support growth and also give it the power to recommend the removal of the bank’s governor, lawmakers said on Sept 16.

BI has now cut its main interest rate by a total of 150 basis points in this cycle, and has expanded liquidity through its open market operations and government bond purchases in the secondary market.

Signs of slowdown

South-east Asia’s largest economy grew 5.1 per cent in the second quarter from a year earlier, the fastest pace in two years, but new Finance Minister Purbaya Yudhi Sadewa has said there were signs of slowing in the third quarter.

Mr Purbaya has criticised BI for keeping banking liquidity “dry”, which has restricted bank lending, as he moved more than US$12 billion (S$15 billion) of government funds from the central bank to commercial banks to be used for loans.

In an apparent response, Mr Warjiyo said liquidity was ample, but demand for credit has been weak as businesses were in a wait-and-see mode.

Banks have approved lending commitments worth 2,372 trillion rupiah (S$184 billion) that have not been utilised, he said.

Me Warjiyo also urged commercial banks to follow BI’s lead in cutting rates, highlighting that their lending rates have fallen only 7 basis points so far in 2025, a small fraction of the cuts in the central bank’s major rates.

However, Mr Warjiyo said he welcomed Mr Purbaya’s decision to move government funds and the new US$1 billion stimulus package for the fourth quarter, which he said could help bolster domestic demand.

DBS economist Radhika Rao said: “Policymakers likely bet on a rewidening in the ID-US rate differential after the US Federal Reserve’s anticipated cut this week, providing more headroom to lower domestic rates in the fourth quarter.” She added that markets were monitoring potential changes to BI’s mandate.

Capital Economics economist Gareth Leather said the surprise cut was likely to heighten concerns about BI’s independence, while Mr Warjiyo’s dovish tone suggests further easing is coming.

“That said, the government and central bank’s clear pivot towards growth-supportive measures risks undermining confidence in policymaking,” Mr Leather said, warning that any resulting adverse market reaction could force BI to reconsider its dovish stance. REUTERS