DIGIVESTASI - HSBC Global Research's Chief Economist for India and Indonesia, Pranjul Bhandari, stated that the reduction in Bank Indonesia's (BI) benchmark interest rate to 5.75 percent has surprised many. This is because all 38 economists surveyed by Bloomberg had previously predicted that BI would maintain its interest rate at 6 percent.

"We anticipated a rate cut this quarter, but not on Wednesday (15/1/2025)," Pranjul said in a statement received in Jakarta on Thursday.

Pranjul added that BI's decision on Wednesday (15/1/2025) was surprising because the rupiah had already depreciated against the U.S. dollar since the beginning of the year, and BI had previously tended to be cautious in responding to a weakening currency.

"For information, BI had even raised the interest rate twice, in April 2024 and October 2023, when the rupiah weakened, although the situation then was not as bad as it is now," he explained.

At the same time, data from the Central Statistics Agency (BPS) released on Wednesday (15/1/2025) showed Indonesia's trade balance surplus in December 2024 was recorded at 2.2 billion USD, although lower than the surplus of 4.4 billion USD recorded in November 2024.

Referring to BI's release, Pranjul reminded that BI recorded weak capital inflows in January, with the trade balance deficit expected to slightly widen in 2025, estimated to be between 0.5 and 1.3 percent of Gross Domestic Product (GDP), higher than the deficit in 2024, which ranged from 0.1 to 0.9 percent of GDP.

"All of these factors made BI's move quite surprising," said Pranjul.

HSBC Global Research believes that concerns over growth were the main factors driving the BI rate reduction. "BI mentioned weaker-than-expected growth in Q4 2024. In fact, between July and November 2024, the Manufacturing PMI contracted, and credit growth slowed (from 12.3 percent in April to 9.5 percent in December 2024)," said Pranjul.

Additionally, BI slightly reduced its 2025 GDP growth forecast from 4.8-5.6 percent to 4.7-5.5 percent, in line with weak trends in exports, consumption, and private investment.

Although inflation remained low, at 1.6 percent in December 2024 compared to the target of 2.5 percent with a 1 percent tolerance, BI forecasted that inflation would remain controlled throughout 2025.

In the foreign exchange sector, BI also noted that the rupiah had weakened by 1 percent against the U.S. dollar since the start of 2025, although this decline was smaller compared to the depreciation of the Philippine peso, Indian rupee, and Thai baht. BI also noted that the rupiah had strengthened against major currencies outside the U.S. dollar.

Looking ahead, HSBC Global Research predicts that BI will make two more interest rate cuts in Q2 2025, each by 25 basis points, bringing the benchmark rate down to 5.25 percent.

"Strategically, we see this monetary easing as making the benchmark rate slightly higher than the level before the pandemic (5 percent in January 2020), considering the volatility in exchange rates in recent years," Pranjul concluded his remarks.

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