In an attempt to boost the economy, Bank Indonesia has lowered its interest rates by 25 basis points today, marking the first cut since January.
The policy rate has been reduced from 5.75% to 5.50%, a move that was forecasted by 20 out of 32 analysts. The remaining 12 analysts had anticipated the rate to remain unchanged.
The economy’s recent weakness has been a key factor in today’s decision, which is the third cut since last September. Official statistics indicate that the GDP growth is steady at around 5.0%, yet recent monthly data appears less optimistic.
Policymakers, including Governor Perry Warjiyo, have voiced increasing concerns about the economy’s outlook. Today’s cut is intended to bolster demand, as stated by Governor Warjiyo.
Inflation, currently at a rate of 2.0% year on year in April, is not a major concern for the central bank. It is anticipated to stay within the bank’s target range of 1.5-3.5% for the coming year.
The central bank had refrained from easing policy in the recent months due to the fall in the rupiah, as part of Bank Indonesia’s mandate is to maintain currency stability. However, the rupiah, although weak by historical standards, has seen a 2.5% rebound against the greenback since the end of April.
According to Capital Economics, the global environment’s uncertainty implies that the exchange rate may remain volatile in the coming months. Consequently, further easing is likely to occur at a gradual pace. They predict an additional 50 basis points of rate cuts this year.
