It was a consequential decision, because it is not merely a reflection of US policy priorities, but it reverberates through the market, capital flows, currencies and growth prospects.

The shift from tightening to loosening will not only shape market and investor expectations in the US, but will also heavily influence the direction of global capital flows, exchange rates and inflationary pressures in other countries, including Indonesia.

The impact on the Indonesian economy will be larger with the decision by Bank Indonesia (BI) to cut its benchmark rates by 25 bps on Wednesday (Jakarta time), made 12 hours before the Fed announced its decision.

Even before the Fed decision, there had been a turn of events in the developments of Indonesia’s macro economy.

First, inflation came down to 2.1 percent in August, from 6 percent in September 2022, historic lows and within the range of the BI target of 2.5+/-1 percent. This was achieved largely by government efforts to secure food supply, especially rice, in cooperation and coordination with regional governments, in addition to increasing rice import quotas from 3.1 million tonnes to 4.1 million tonnes in 2024.

Second, capital flows have surged. Net portfolio flows in the balance of payments turned into surplus of US$3 billion in the second quarter (Q2) 2024, after deficits of $1.8 billion in Q1. The flows came largely from the Sertifikat Rupiah Bank Indonesia (SRBI) securities, which attracted $6 billion funds in the quarter.