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By Gayatri Suroyo and Stefanno Sulaiman
JAKARTA (Reuters) -Indonesia's central bank unexpectedly cut policy rates on Wednesday, resuming its monetary easing to prop up growth in Southeast Asia's largest economy despite financial market volatility that has sharply weakened the rupiah currency.
Bank Indonesia (BI) cut the benchmark 7-day reverse repurchase rate by 25 basis points to 5.75%, its first cut since September. The benchmark is now at its lowest in over a year.
All 30 economists polled by Reuters had expected no change in rates, citing pressure on the rupiah as the U.S. dollar climbs. Traders believe the central bank has been selling dollars for weeks to slow the local currency's slide.
The bank also trimmed its deposit facility rate and lending facility rate by 25 basis points each to 5.00% and 6.50%, respectively.
"This is the timing to lower rates so we can create a better growth story," BI Governor Perry Warjiyo said after announcing the surprise cut.
BI will "monitor for space to further support economic growth", he said, in a hint the central bank might take more measures to stimulate the economy.
The main factor behind the cut was signs of weaker-than-expected economic growth in the final quarter of 2024, Warjiyo said, adding that the low inflation outlook through to 2026 has provided room for policy easing.
While uncertainties regarding U.S. monetary policy remained, BI was better able to gauge the impact on the Indonesian economy, he said.
Economic growth in 2024 is expected to be slightly below the midpoint of BI's forecast range of 4.7%-5.5%, the bank said, while revising down its 2025 growth outlook to 4.7%-5.5% from 4.8%-5.6% previously, due to expectations of softer household consumption and weaker exports.
The central bank cut interest rates for the first time in more than three years in September, but had then held policy steady at subsequent meetings to anchor the rupiah, which has been under pressure amid uncertainty about U.S. policy under President-elect Donald Trump.
The rupiah slid to a six-month low of 16,335 per dollar after the rate cut, while the benchmark stock index rallied and was up 1.8% as of 0850 GMT.
"What had been our main concern was global uncertainty and its impact on the exchange rate," the governor said.
"We have assessed that the current exchange rate is relatively stable and in line with fundamental value going forward," he added.
Indonesia's inflation has been moderate, with December's annual rate of 1.57% close to the bottom end of BI's 1.5% to 3.5% target range.
Radhika Rao, an economist at DBS, said the surprise decision signalled a shift in focus towards growth, which was in contrast with BI's previously more cautious comments about the currency.
The shift might apply more pressure on the rupiah, however.
"Clearly the BI is grappling with dual objectives of supporting the economy and the depreciation of rupiah. The decision to cut rate inevitably put pressure on the rupiah, which will be on the backfoot now," said Lloyd Chan, currency analyst at MUFG Bank.
"Gradual tariff hikes by the incoming Trump administration could lead to some reprieve for the rupiah," he said.
(Additional reporting by Fransiska Nangoy and Ananda Teresia in Jakarta, Sneha Kumar in Bengaluru and Ankur Banerjee in Singapore; Editing by John Mair and Kim Coghill)
