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Indonesia central bank surprises with rate cut

Indonesia's central bank surprised markets by cutting its benchmark interest rate on Tuesday by 25 basis points to 7.50 percent, its first cut since 2011.

All 20 analysts in a Reuters poll had expected BI would keep the benchmark steady at 7.75 percent, even though Indonesia's inflation rate has declined and the growth rate is at its lowest in five years.

Economists thought that rates would be held to help contain Indonesia's current-account deficit, which was nearly 3 percent of gross domestic product (GDP) in 2014, and to discourage capital outflows ahead of a rate hike by the Federal Reserve.

Mirza Adityaswara, deputy governor of Bank Indonesia, said the rate cut was "still in line with BI's prudency in maintaining the current account deficit ... the normalization of the Fed is still in our focus in keeping prudency and maintaining future monetary policy."

He also said that inflation in 2015 will be in the lower end of the central bank's range.

A man rides a bicycle past residential apartment buildings under construction in Jakarta, Indonesia.
Dimas Ardian | Bloomberg | Getty Images

Tuesday's action reverses a 25 basis point hike that BI made in November the day after President Joko Widodo increased fuel prices. It explained the rate hike as containing inflation expectations, as fuel price increases in Indonesia have traditionally triggered a spike in inflation.

Later, Widodo overhauled fuel-subsidy policies, helped by tumbling global oil prices, and retail pump prices in Indonesia were cut.

In January, annual inflation in Southeast Asia's largest economy was 6.96 percent, lower than December's 8.36 percent.

Gareth Leather of Capital Economics said Tuesday's cut was a surprise given November's rate hike.

"Although inflation remains above BI's 3-5 percent inflation target, it is likely the recent downward pressure on inflation from easing oil prices persuaded BI to loosen policy today," he said, adding that "an aggressive series of rate cuts is unlikely".