Indonesia's central bank cut interest rates only three months after raising them. Such jumpiness is rare, but rational. The speed of disinflation has taken central banks from Sydney to Singapore and Mumbai to Beijing by surprise. They are now scrambling to keep borrowing costs in check.
Bank Indonesia unexpectedly lowered its benchmark rate by a quarter percentage point to 7.5 per cent on Tuesday. The central bank said it was cutting rates because of its "conviction" that inflation would be at the lower end of its three to five per cent target this year and next.
Considering that consumer prices rose almost seven per cent in January from a year earlier, it's clear that Bank Indonesia is anticipating massive disinflation. It's not alone. India and Australia, too, have cut interest rates this year. South Korea may do so next month. Meanwhile, Singapore has slightly eased its policy of gradual appreciation of the city-state's currency.
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While the slumping price of oil will eventually lift output in energy-importing Asian nations, its more immediate impact is to raise real borrowing costs for companies and individuals. Inflation-adjusted long-term interest rates have surged to unusually high levels in six of 12 major economies in the region. That's bad news because GDP growth rates are lower than historical averages.
Then there is the insurance motive. By cutting interest rates, commodity-producing economies like Australia and Indonesia can mitigate the risk of a disorderly growth slowdown in China. Buying such insurance may be sensible. If China's growth collapses, global disinflation could turn into outright deflation.
Prohibitively high real borrowing costs would thwart investment and job creation, and discredit the reform push of Indonesian President Joko Widodo. The central bank's decision to cut rates may look like a flip flop, but it is rational in every sense.
