Indonesia’s central bank unexpectedly cut its main interest rate for the first time in three years, joining global counterparts in easing monetary policy to support Southeast Asia’s biggest economy as inflation cools.
Bank Indonesia governor Agus Martowardojo and his board lowered the reference rate to 7.5% from 7.75%, the authority said in Jakarta on Tuesday.
All 20 economists surveyed by Bloomberg News had predicted no change. The central bank also reduced the rate it pays lenders on overnight deposits, known as the Fasbi, by 25 basis points to 5.5%.
The country’s economy shrank last quarter from the previous three months, capping the weakest year since at least the global financial crisis on falling commodity prices and cooling investment. Policy makers are cutting borrowing costs before potential interest-rate increases in the US this year raise the risk of fund outflows from emerging markets.
“This means they have shifted their focus from the current-account deficit to bigger worries about slowing growth,” Euben Paracuelles, a Singapore-based senior economist at Nomura Holdings, said before the decision. “This could be tricky, when you are trying to boost growth, import demand goes higher. I think the pressure on the rupiah could increase.”
The rupiah has fallen almost 3% this year, the worst performer in Asia among 11 widely-traded currencies tracked by Bloomberg. The current account deficit is about 3 of gross domestic product.
Indonesia’s growth slowed to 5.02% last year from a 5.58% pace the previous year. President Joko Widodo, who took office in October, has set a target of 5.7% in 2015. The central bank said on Tuesday it sees the expansion this year to be at 5.4% to 5.8%.
Bank Indonesia raised the reference rate to 7.7%t from 7.5 at an unscheduled meeting on Nov 18. The move was aimed at countering inflation triggered by a government decision to trim state-fuel subsidies.
The subsidy cut led to higher prices at the pump, yet the fall in global crude has meant retail prices have since fallen. Consumer price gains slowed in January to 6.96% from a year earlier, compared with 8.4% in December. Inflation in 2015 will be at the lower end of the 3% to 5% target, the central bank said on Tuesday.