Indonesia's central bank unexpectedly cut its benchmark policy rate on Tuesday, the first such move by a G20 economy after Brazil, as it seeks to stimulate domestic demand as global growth slows.
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Bank Indonesia cut the rate by 25 basis points (bps) to a record-low 6.50 percent, saying it expected a weaker global economy to weigh on demand for the country's exports next year.
Just a month ago, many analysts still expected Bank Indonesia to raise rates once more this year to curb inflation, but recent turmoil in global financial markets had led some to forecast a 25 bps rate cut in November or December to boost growth.
In a Reuters poll, all 11 analysts had forecast that BI would leave the rate unchanged at 6.75 percent on Tuesday, though three of the 11 forecast a cut to 6.50 percent by year-end.
In September, annual inflation slowed to 4.61 percent due to easing food prices, and a central bank official told Reuters in an interview last week that inflation would be below 4.9 percent by the end of the year, within BI's target of 4 to 6 percent.
The central bank has shifted its policy focus from fighting inflation to stimulating growth.
It last raised the policy rate in February to address inflation worries, and recently said it was ready to cut rates to boost growth that is now seen at 6.5 percent next year, lower than a previous estimate of 6.7 percent.
"We are bringing the policy rate to a level that is more reasonable," Governor Darmin Nasution told reporters. "We saw the 6.75 percent rate as too high, unless we estimated inflation next year to be very high."
As global funds saw Europe's debt crisis intensify, they pulled money out of riskier emerging market assets such as Indonesian stocks and bonds.
In early September, foreigners owned 251.23 trillion rupiah ($28.3 billion) in bonds, or 35.7 percent of the total. Between then and Oct. 5, they sold 37.13 trillion rupiah worth, reducing their ownership to 30.7 percent.
"The decision to cut the benchmark rate confirms the central bank's view of a slowdown and that they may feel that the external shocks to the economy are more than previously expected," said David Sumual, economist at BCA in Jakarta.
The rupiah [IDR= 8905.00 
20.00 (+0.23%) 
]has slid 5 percent since the end of August amid global market turmoil, though BI has heavily intervened in the foreign currency market to cushion its fall, causing the country's forex reserves to fall to $114.5 billion as of Sept. 30 from $124.6 billion a month earlier.
20.00 (+0.23%) ]has slid 5 percent since the end of August amid global market turmoil, though BI has heavily intervened in the foreign currency market to cushion its fall, causing the country's forex reserves to fall to $114.5 billion as of Sept. 30 from $124.6 billion a month earlier.BI issued a regulation this month requiring local exporters and firms to bring home offshore earnings and debt proceeds starting next year, estimating this could add $30 billion to the local financial system, reducing dependency on dollars from short-term inflows.
Indonesia's economy is expected to post solid 6.6 percent growth this year as exports remain strong despite the global slowdown. It grew by 6.5 percent in the first half on buoyant household consumption and investment.
Economists say Indonesia is in better shape to face a global crisis than in 2008 and will likely expand above 6 percent next year even with an international slowdown.
cnbc.com
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