Indonesian rupiah tumbles to 6-month low after surprise key rate cut
Nurluqman Suratman
16-Jan-2025
SINGAPORE (ICIS)–The Indonesian rupiah fell to its weakest level in more than six months on Thursday following an unexpected loosening of monetary policy on 15 January to spur growth in southeast Asia’s largest economy.
- Rupiah weakened due to US policy uncertainty under Trump
- 2025 GDP growth forecast trimmed to 4.7-5.5%
- Inflation to remain within 1.5-3.5% target in 2025
The rupiah (Rp) was extending losses on Thursday, falling to as low as Rp16,383 against the US dollar in early trade.
At 07:41 GMT, the rupiah was trading at Rp16,376 to the US dollar.
In a surprise move, Bank Indonesia (BI) lowered its benchmark seven-day reverse repurchase rate by 25 basis points (bps) to 5.75% on 15 January.
BI also reduced its deposit facility rate by 25bps to 5.00% and lending facility rate to 6.50%.
“The decision is consistent with low projected inflation in 2025 and 2026…maintaining the rupiah exchange rate in line with economic fundamentals to control inflation within the target range and the need to bolster economic growth,” BI said in a statement.
BI last slashed interest rates in September last year for the first time in over three years.
However, it subsequently maintained a steady policy stance at later meetings to stabilize the rupiah, which had come under pressure due to uncertainty surrounding US policy under Donald Trump.
“The rate cut was unexpected as BI previously emphasized that its near-term policy stance is aimed at rupiah stability amid strong US Dollar,” Malaysia-based equity research firm Kenanga said in a note on Thursday.
“The shift reflects a focus on boosting growth amid slowing domestic expansion, low inflation, and rising global uncertainties, including geopolitical tensions, China’s weak recovery, and policy changes in the US,” it said.
BI is expected to maintain an easing stance to bolster economic growth, Kenanga said, but concerns regarding rupiah stability may prompt a gradual and cautious approach, particularly as the US Federal Reserve may slow its rate cuts due to the resilience of the US economy.
“We expect the rupiah to gradually strengthen by the end of 2025 on the expectations of lower US policy rate and an improving domestic economy, it said.
“Nonetheless, we expect two more cuts, bringing BI’s policy rate to reach 5.25% in 2025.”
SLOWER GROWTH PROJECTED
BI on 15 January revised its 2025 GDP growth
forecast to 4.7-5.5%, slightly lower than its
previous projection of 4.8-5.6%.
This downward revision is attributed to weaker exports, subdued household demand, and lower private investment.
Indonesia is a net importer of several petrochemicals, including polyethylene (PE) and polypropylene (PP), as well as the world’s largest crude palm oil (CPO) producer – a key oleochemicals feedstock.
Like most in Asia, Indonesia is export-oriented economy. Its full-year exports rose by 2.3% year on year to $264.7 billion, while imports increased by 5.3% to $233.66 billion, resulting in a trade surplus of around $31 billion, official data showed.
For the month of December alone, the country’s trade surplus narrowed to $2.24 billion, marking the lowest surplus since July, as exports to key markets, including China, India, and Taiwan declined.
Total exports for the month were up by 4.8% year on year at $23.46bn, while imports grew at a faster rate of 11.1% to $21.22 billion.
For 2024, growth is expected to settle slightly below the midpoint of the 4.7-5.5% range, reflecting softer domestic demand.
Indonesia’s GDP grew by 5.05% in 2023, slowing from the 5.31% expansion the previous year due to sluggish exports.
BI in its statement highlighted that the global economy is experiencing growth divergence, with the US exceeding projections due to fiscal stimuli and technological investments, while Europe, China, Japan, and India face sluggish growth.
The global economic growth for 2025 is expected to reach 3.2%, driven by the strong US economy, it noted.
However, US policy and inward-looking trade policies are prolonging disinflation and strengthening expectations of dovish monetary policy, leading to increased global financial market uncertainty, BI said.
“Global economic developments require a strong policy response, therefore, to mitigate the adverse impacts of global spillovers, maintain stability and drive domestic economic growth,” it added.
In terms of inflation, CPI inflation averaged 2.3% in 2024, well within BI’s target range of 1.5-3.5%.
Inflation is expected to remain within this target in 2025, supported by ample domestic capacity to meet demand.
Focus article by Nurluqman Suratman
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