Jokowi denies intervention in monetary policy

President Joko "Jokowi" Widodo has denied exerting political pressure on Bank Indonesia (BI) to lower interest rates, as the central bank's independence came into question following an unexpected shift in monetary policy that caught the markets unaware.

"Interference [in BI's independence to set monetary policy] is prohibited," Jokowi said on Wednesday. When asked on whether there was any political pressure exerted on BI to lower its interest rates, the President replied: "No."

Nevertheless, he made no secret of his preference for lower interest rates to support economic growth, thus taking a different stance to former president Susilo Bambang Yudhoyono, who tolerated high interest rates and lower growth in the final years of his leadership to maintain economic stability.

"When our inflation can fall to below 5 per cent or even 4 per cent, then certainly the BI rate should follow," Jokowi said. "We recorded deflation in January. If this trend continues in February and March, then it will be easier [for BI] to lower its interest rates."

The central bank is guaranteed independence in the 2004 Bank Indonesia Law, which forbids government officials - including the President - from interfering in monetary-policy decisions.

However, last week the central bank, in a surprise move, lowered the benchmark BI rate by 25 basis points to 7.5 per cent, a decision that was taken after Vice President Jusuf Kalla had publicly declared the need for BI to lower rates to spur growth.

On Wednesday, Jokowi summoned Agus to the State Palace for a meeting which, according to the President, discussed developments in the global economy and their impact on Indonesia, particularly exchange rates.

Agus has often been seen at the State Palace in recent weeks. Prior to the BI board of governors' meeting this month the governor was summoned by Jokowi for a meeting that centred on high interest rates.

"It may look strange at first because the previous president rarely did this, but I notice the current President is an easygoing type of person," Coordinating Economic Minister Sofyan Djalil said on Wednesday, when asked about the increasing frequency of visits by the BI governor to the Palace.

"The President just wants to establish good lines of communication between the government, the Financial Services Authority [OJK], BI and all economic stakeholders," he explained.

BI's decision to lower its rate surprised market players as Agus had consistently stressed the need for high interest rates to maintain economic stability amid the prevailing uncertainty in the global markets.

The rupiah has dropped more than 1 per cent since the rate cut. The currency, which had fallen to 12,922 against the US dollar on Tuesday, its lowest level in six years, gained slightly to 12,858 on Wednesday as the greenback weakened against most global currencies after Federal Reserve chair Janet Yellen downplayed the possibility of an immediate increase in US interest rates.

The BI governor has insisted that the interest-rate cut was based on economic reasons, notably the declining trend in inflation, and that the bank was not influenced by any political considerations when making the decision.

However, some analysts have questioned BI's arguments. Analysts from Nomura Holdings Inc., a Japan-based fund manager, noted that the BI rate cut had a "weak basis".

"We view this decision as a quick turnaround in BI's stance which may not be well-justified with only small changes to their assessment of the policy parameters," Euben Paracuelles and Lavanya Venkateswaran, economists from Nomura Holdings Inc., wrote in a report analysing the rate cut.