Indonesia’s benchmark foreign exchange index fell 0.4% in March, according to the country’s central bank, but the yield remained high at 2.9%.
Analysts say the country still has enough foreign exchange reserves to withstand the drop in interest rates.
“It’s a little bit disappointing that it fell, but there are still plenty of foreign exchange that are not yet withdrawn, and that’s the main problem,” said Kwon Yoo-jin, an economist at BNY Mellon.
“That’s why we’re concerned that the rate cut is going to be short-lived.”
In 2016, Indonesia’s central Bank cut its key interest rate to 6.75%, which was still a high rate, but that was due to a number of factors, including rising inflation, rising unemployment, and a fall in oil prices.
The latest decision is being seen as a way to ease the pressure on the central bank’s balance sheet, which has seen it struggle to keep interest rates near record lows.
In its statement, the central Bank said the rate decision would take effect on 1 March, the first day the government can start to withdraw money from the reserves.
However, a number to adjust the benchmark rate in April and May could help the country to avoid a sudden drop in foreign exchange.
Indonesia’s central banker, the deputy governor, told Reuters the central government would also review the rate policy in 2018, according a transcript of his remarks posted on social media.
Analysts at Nomura said the latest rate cut will help Jakarta cope with the effects of the recent low oil prices, but it remains to be seen how effective it will be in terms of reducing inflation.
“The rate cut should be enough to reduce inflation in the short term, but in the long run, it is still uncertain whether the rate will be a significant driver of economic growth,” Nomura’s head of currency strategy, Peter Wibord, wrote in a note to clients on Wednesday.
“However, it appears to be a modest measure that is unlikely to have a large impact on economic growth over the medium term.”
Indonesian interest rates, which had been above 10% since 2014, have been falling steadily since March.