What’s happening?

Bank Indonesia (BI) surprised the markets on September 18 by lowering the BI Rate by 25 basis points (bps) to 6.00% for the first time since January 2021, just one day before the Fed’s announcement. The rationale behind BI’s decision aligns with forecasts for a low inflationary environment in 2024 and 2025, within the target range of 2.5±1%, a stable Rupiah, and the need to support economic growth. BI projects further strengthen the Rupiah towards the end of 2024 due to the global rate-cut cycle. The Rupiah has already appreciated by 0.63%, reaching 15,240 as of September 19. BI will closely monitor the macro environment to assess the potential for additional rate cuts.

The Fed has finally joined the rate-cut cycle, enacting its first interest rate cut since the beginning of the Covid pandemic in 2020 by unexpectedly lowering 50 bps to a range of 4.75-5.00%. The market had anticipated a more conservative reduction of 25 bps. The Fed’s chairman, Jerome Powell, described the larger-than-expected rate cut as a “recalibration” of monetary policy to reflect an economy where price pressures are easing while demand from the labour market is cooling. The Federal Open Market Committee (FOMC) has made it clear that this will not be the last move, with further reductions expected by another half-percentage point by year-end, followed by a series of cuts in 2025 to bring rates to 3.25-3.5%.

What does it mean for us?

Typically, a low-interest-rate environment stimulates economic growth by reducing the cost of borrowing, encouraging households and consumers to take out loans for personal purposes, and businesses to borrow for expansion. Additionally, risky asset classes such as equities and bonds—particularly in emerging markets—tend to attract significant foreign fund flows as investors seek higher returns. Indonesia’s economy benefits from this environment due to its solid fundamentals and relatively reasonable valuation against its Southeast Asian peers.

Simpan Views

As we welcome a lower interest rate environment, the rate-cut cycle marks a significant milestone for countries worldwide, signalling that the battle against inflation over the past two years is drawing to a close. We expect further rate cuts by major central banks, including the Fed and BI, as they aim to reach neutral interest levels. We believe the investment theme for the rest of the year will be an “interest rate-cut play,” signalling a solid outlook for both equity and bond markets. For equities, we reiterate our overweight status on metal mining commodities and financials that tend to benefit in lower interest rate conditions while extending the duration of our fixed income portfolio. 

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