Although global media focus on the vicious terrorist attacks that occurred today in Jakarta, the country's central bank (Bank Indonesia) made a surprise move by cutting its key interest rate (BI rate) by 25 basis points to 7.50 percent at the January policy meeting. It is a surprise as Bank Indonesia emphasized repeatedly that it is primarily focused on rupiah stability while - amid severe market volatility (due to economic turmoil in China) - the rupiah remains under pressure.
Bank Indonesia also cut the overnight deposit facility rate and lending facility rate by 25 basis points to 5.25 percent and 7.75 percent, respectively. It was the first interest rate cut in Indonesia since February 2015.
An interest rate cut tends to weaken the currency and local stocks as yields become less attractive to foreign investors. However, the positive effect of the rate cut is that it provides more room for domestic economic growth as local businesses and consumers have access to cheaper borrowing costs. The economy of Indonesia is estimated to have slowed to 4.7 percent (y/y) in 2015, the slowest GDP growth pace since 2009. Prior to Bank Indonesia's rate cut Indonesia's GDP growth in 2016 was estimated at 5.3 percent.
The Indonesian rupiah had depreciated 0.36 percent to IDR 13,886 per US dollar by 15:30 pm local Jakarta time (Bloomberg Dollar Index). Earlier today, when the news spread about the terrorist attacks, Indonesia's currency nearly touched the IDR 14,000 per US dollar level.
Bank Indonesia had more room to cut its tight monetary stance after inflation eased to 3.4 percent (y/y) in December 2015 after Indonesia had been experiencing two years of high inflation due to subsidized fuel price reforms in 2013 and 2014.
Bank Indonesia's BI Rate: