Indonesian central bank springs surprise, cuts rates

Indonesia's central bankers surprised financial markets by lowering interest rates in South-East Asia's largest economy on Tuesday with some economists anticipating further cuts.

Bank Sentral Republik Indonesia lowered the benchmark policy rate by 25 basis points to 4.50%, confounding the majority of economists whose forecast had been for no change.

Nevertheless, as of 1526 BST the US dollar was little changed on the rupiah; indeed it was still 0.05% lower on the day at 13,344.00.

Central bank chief Agus Martowardojo reportedly told journalists the decision was taken on the basis of recent lower readings on inflation and expectations for only one more interest rate hike from the US Federal Reserve later in 2017.

Reading in between the lines, the recent and expected exchange rate of the rupiah appeared to be a key variable in the monetary authority's underlying logic.

To take note of, the decision taken by rate-setters in Jakarta came amid recent rate cuts in India and Vietnam.

Inflation in the archipelago slowed from a 4.4% year-on-year clip in June to 3.9% for July, versus a BoI target range for CPI inflation of between 3.0% and 5.0%.

Meanwhile, at roughly 5% the rate of growth in the country's gross domestic product was still short of President Joko Widodo's goal of 7%, although a pick-up towards 5.4% next year was seen.

"The main reason BI has not cut rates sooner is worries about the outlook for inflation and the exchange rate. [...] Meanwhile, despite a series of rate hikes by the US Fed since the start of the year, the rupiah has remained fairly stable against the US dollar," said Gareth Leather, senior Asia economist at Capital Economics.

"We think today’s cut is unlikely to be the last in the current cycle. We expect one further rate cut this year."