Bank Indonesia Expected to Cut Rates Twice in Q4 as Fed Easing Boosts FX Confidence, Reuters Poll Reveals

By Rahul Trivedi

BENGALURU – Economists predict that Bank Indonesia (BI) will implement two more interest rate cuts this year following an unexpected reduction on September 18. The anticipated cuts come as the rupiah strengthens and inflation remains subdued, allowing the central bank to prioritize economic growth.

BI’s recent rate cut, which occurred just hours before the U.S. Federal Reserve’s 50 basis points policy reduction, reflects a shift in strategy for BI Governor Perry Warjiyo. He emphasized a balance between maintaining currency stability and fostering economic growth.

Warjiyo mentioned that the Fed’s clearer stance on monetary policy created an opportunity for BI to lower rates. With expectations of further U.S. rate cuts, economists believe that BI may pursue additional reductions without the same level of concern for adverse currency impacts.

In a recent Reuters poll conducted from September 19-24, more than half of the economists surveyed—11 out of 21—expected the central bank to reduce its benchmark seven-day reverse repurchase rate by 25 basis points to 5.75% in the upcoming October meeting. The remaining economists predicted no change, keeping the rate at 6.00%.

Median forecasts suggested another 25-basis-point cut could occur in either November or December, potentially lowering the key rate to 5.50% by the end of the year. The Fed is also anticipated to cut rates further by 25 basis points in both November and December, according to a recent snap poll.

Kunal Kundu, an economist at Societe Generale who accurately predicted last week’s BI cut, noted, "Now that the Fed has signaled a rather dovish pivot with a 50bp rate cut, BI has been afforded the luxury of allowing itself to be more inward-looking and calibrating its monetary policy to support growth."

While the central bank has maintained its 2024 GDP growth forecast at 5.1%—the midpoint of its preferred range of 4.7% to 5.5%—it highlighted the necessity for policy measures to accelerate economic expansion.

Median forecasts through the end of 2025 indicated rates could drop to 5.00%, a decrease of 25 basis points from the previous poll and 100 basis points lower than the current rate. The Fed is expected to cut rates by 150 basis points during the same timeframe.

According to economists, BI is likely to pursue a more gradual easing cycle compared to the Fed in order to retain the attractiveness of its currency. Jeemin Bang, an associate economist at Moody’s Analytics, stated, "As the U.S. Federal Reserve reduces interest rates more rapidly than Bank Indonesia, foreign investors may increasingly look towards Indonesia for favorable returns."