Indonesia's U-turn to rate cuts in 2024 as rupiah rebounds

Like Western economies, the ASEAN nations are embarking upon monetary easing as growth decelerates and inflation moderates.

First to cut was the Philippines. Next came Indonesia, the region’s largest economy -- an interesting case because of the surprise rate hike implemented earlier this year.

Bank Indonesia has a dual mandate that includes stabilizing the currency, which explains the 180-degree turn over the course of 2024. A weak rupiah tends to import inflation, and the central bank was worried about this when it hiked in April.

With the rupiah regaining the value it had lost against the US dollar earlier in 2024, and headline inflation remaining below the central bank’s target since July, Bank Indonesia has achieved its objective of stabilizing the currency. Additionally, the dovish messaging from the Federal Reserve, which recently enacted a 50-basis-point cut, likely supported Indonesia's decision to ease monetary policy.

Our final chart shows another reason for the urgency of Indonesia's move. Comparing the purchasing managers' index (PMI) manufacturing surveys of ASEAN nations, negative sentiment in Indonesia stands out: PMI has worsened sharply since April and been outright pessimistic since July.

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