JAKARTA. Bank Indonesia's decision to cut its benchmark interest rate to 5.75% on Wednesday (15/1) today came as a surprise to market participants. 

A number of economists surveyed by Reuters did not even predict a cut in the BI benchmark interest rate. This is because the rupiah has been under strong pressure from the US dollar in recent days. In addition, inflation in Indonesia has moderated to 1.57% in December 2024.

‘This is the right time to lower interest rates so that we can create a better growth story,’ BI Governor Perry Warjiyo said after announcing the cut.

Radhika Rao, DBS Economist, said this decision shows BI's shift in focus towards domestic economic growth. However, this decision is different from BI's previous plan, which was to be more careful in maintaining the rupiah exchange rate.

The decision also makes BI face a double task, according to Currency Analyst at MUFG Bank Lloyd Chan. ‘It is clear that BI is facing a dual objective of supporting the economy and addressing rupiah depreciation. The decision to cut interest rates is bound to put pressure on the rupiah, which will now be in a vulnerable position,’ Lloyd said. 

Nonetheless, Lloyd added, the gradual increase in tariffs by the Trump Administration could potentially help the rupiah, but in a limited way. (KR/LM)