Bank Indonesia to cut twice in Q4 as Fed easing shores up FX confidence, Reuters poll shows

By Rahul Trivedi

BENGALURU (Reuters) - Bank Indonesia (BI) will cut interest rates twice more this year following a surprise reduction on Sept. 18, a Reuters poll of economists predicted, as a stronger rupiah and subdued inflation allows the central bank to focus on supporting growth.

In cutting rates just hours before the U.S. Federal Reserve slashed its policy rate by 50 basis points last week, BI Governor Perry Warjiyo signaled a policy shift from keeping the rupiah currency stable to a balance between that and economic growth.

Warjiyo said the Fed's clearer direction on monetary policy provided BI with an opportunity to cut rates. 

With a series of U.S. rate cuts expected, further BI reductions are on the cards with less concern about hurting the currency, economists said.

Over 50% of economists in a Sept. 19-24 Reuters poll, 11 of 21, forecast the central bank to cut its benchmark seven-day reverse repurchase rate by 25 basis points to 5.75% at its October meeting. The remaining 10 expected no change from 6.00%.

Median forecasts showed another 25-basis-point cut in either November or December, bringing the key rate to 5.50% by year-end.

The Fed was expected to cut by a further 25 basis points in both November and December, a snap Reuters poll found on Friday.

"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," said Kunal Kundu, economist at Societe Generale, one of the few analysts who correctly predicted the BI cut last week.

While the central bank maintained its 2024 gross domestic product (GDP) growth forecast at 5.1%, the midpoint of its preferred 4.7% to 5.5% range, it underscored the need for policy measures to accelerate economic growth.

Median forecasts through end-2025 showed rates falling to 5.00%, 25 basis points lower than the previous poll and 100 basis points lower than currently.

The Fed is expected to cut by 150 basis points over the same period, according to the latest poll.

BI is likely to pursue a slightly shallower easing cycle compared to the Fed to maintain the attractiveness of its currency, economists said.

"As the U.S. Federal Reserve reduces interest rates more rapidly than Bank Indonesia, foreign investors may increasingly look towards Indonesia for favorable returns," said Jeemin Bang, associate economist at Moody's Analytics.

(Reporting by Rahul Trivedi; Polling by Susobhan Sarkar and Anant Chandak; Editing by Hari Kishan, Ross Finley and Shri Navaratnam)