In a surprise move, Bank Indonesia (BI) slashed its policy rate by 25 basis points (bps) to 6.00% ahead of the US FOMC meeting, indicating its shifted focus to economic growth.
The Deposit Facility and Lending Facility rates were also lowered by 25 bps to 5.25% and 6.75%, respectively.
Favourable inflation outlook and continued strengthening of rupiah allows for easing policy to boost GDP growth. BI maintains its 2024 growth forecast at 4.7% – 5.5% (2023: 5.1%), but acknowledged that higher growth is needed, signalling stronger efforts to support domestic economy. Growth is expected to be driven by higher investment, robust household consumption, increased non-oil & gas exports and government spending.
Indonesia’s 2Q24 GDP growth slowed to 5.0% (1Q24: 5.1%), trailing regional peers which had expanded strongly like Vietnam (6.9%; 1Q24: 5.9%), Philippines (6.3%; 1Q24: 5.8%) and Malaysia (5.9%; 1Q24: 4.2%). With growth becoming a priority, analysts expect BI to implement additional rate cuts in 4Q24 to further support the economy.
BI said it has realigned itself on balancing inflation, the rupiah and growth, adding that, “the decision is consistent with the low inflation forecast in 2024 and 2025, the strengthening and stability of the rupiah and the need to boost economic growth.” This marks a departure from its previous stance which focus on stabilising the rupiah.
Governor Perry Warjiyo had previously hinted at monetary policy easing later in 4Q24.
BI continues to project inflation within its target range of 1.5% – 3.5% for 2024 and 2025 (2023: 3.7%). This is reflected in the August inflation reading which came in at 2.12% (Jul: 2.13%), which remained low and within target.
Currency-wise, on September 17th, the rupiah appreciated by 1.0% against the USD compared to end-August, although
this was slightly below the appreciation seen in regional currencies such as baht (2.0%), and ringgit (1.4%). However, Kenanga maintains its year end forecast, despite the recent gain, with the rupiah trading below 15,400 level against the USD.
