It was not a total surprise. In fact, signs were on the wall. On Tuesday (22/08) the central bank of Indonesia (Bank Indonesia) decided to cut its benchmark BI 7-day (Reverse) Repo Rate by 25 basis points to 4.50 percent at the August 2017 policy meeting. It was the first time since October 2016 that Bank Indonesia altered its key rate. Meanwhile, the deposit facility and lending facility rates were also cut by 25 basis points, to 3.75 percent and 5.25 percent, respectively.
Bank Indonesia could resume monetary easing (earlier - in 2015 and 2016 - Bank Indonesia cut the benchmark six times, by a total of 1.5 percentage points) as global economic growth is expected to improve, particularly in China and the European Union. This improvement should boost international trade and commodity prices and therefore impact positively on the Indonesian economy.
Meanwhile, Bank Indonesia Governor Agus Martowardojo said the central bank expects one more rate hike in the USA this year, which - if correct - would mean slower monetary tightening in the world's top economy than previously had been anticipated.
Other important factors that allowed monetary easing in Indonesia are controlled inflation and the controlled current account deficit, while the rupiah exchange rate has remained very stable against the US dollar over the past eight months.
For the government it is good news that interest rates become more affordable as it should translate to credit growth, accelerating economic activity, hence a higher economic growth pace. In the first two quarters of 2017 Indonesia's economy expanded at a rate of 5.01 percent (y/y), a rather disappointing pace.