Indonesia's surprise rate cut, growth gambit put rupiah in the crosshairs

Bank Indonesia's rate cut this week stunned markets for all the wrong reasons - investors fear the central bank is bowing to pressure from President Prabowo Subianto to juice the economy, compromising its independence and risking a rupiah selloff.

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Global investors have been increasingly nervous about Indonesian assets following protests in many cities since late August, while the abrupt sacking of respected finance minister Sri Mulyani Indrawati last week stoked fiscal worries.

The interest rate cut on Wednesday, a move not expected by any of the 31 economists surveyed by Reuters, is now raising concerns about the central bank's independence and bringing Prabowo's growing influence into focus as the president pushes ahead with an ambitious goal of lifting growth to 8% from the current 5% pace.

Bank Indonesia’s (BI) shock decision comes as investors worldwide grapple with the rising threat to the independence of central banks, an issue that has been brought to the fore by the repeated attacks on the Federal Reserve and its policymakers by President Donald Trump and his administration.

Southeast Asia's largest economy has been struggling to push ahead with Prabowo’s populist and costly spending plans since he came to power last year.

The worry for investors is that the hard-won fiscal credibility risks being sacrificed by the president's push to speed up growth, leading to a worsening in the current account position and higher inflation, with a politicized central bank unable to keep a lid on it.