Bank Indonesia unexpectedly cut its benchmark interest rate by 25 basis points to 4.75%, marking the third consecutive cut and signaling a shift from monetary tightening to easing. This decision defied market expectations, which anticipated the rate to remain steady at 5.0%.
اضافة اعلان
This is the sixth rate cut since last September, bringing the benchmark rate to its lowest level since October 2022.
Reasons Behind the Rate Cut
Bank Indonesia cited three main factors for the decision:
Inflation Control
Annual inflation fell slightly to 2.31% in August, staying within the central bank’s target range of 2.5% ± 1%.
The bank expects inflation to remain within the target range throughout 2025–2026.
Exchange Rate Stability
The stability of the rupiah played a key role, reflecting confidence in the bank’s ability to manage capital flows and maintain the currency’s value.
Economic Growth Support
Indonesia’s GDP grew 5.12% year-on-year in Q2, the fastest pace in two years.
Despite strong growth, the rate cut aims to further stimulate economic momentum by easing credit availability and encouraging investment.
Additionally, Bank Indonesia lowered the overnight deposit rate by 50 basis points to 3.75% and the lending facility rate by 25 basis points to 5.50%, further reinforcing the easing stance to stimulate bank lending and economic activity.
Expected Impacts of the Decision
Boost to Lending and Investment
Lower interest rates can encourage borrowing by businesses and consumers, stimulating investment and consumption, and potentially increasing economic growth.
Pressure on the Rupiah
While the currency is currently stable, reduced rates may make the rupiah less attractive to foreign investors, potentially leading to future depreciation.
Inflation Risks
Although inflation is under control, excessive monetary easing could raise inflationary pressures, especially if government spending is not managed carefully.
Financial Market Reactions
Lower interest rates may boost stock prices and government bonds, benefiting investors in these markets.
This move highlights Bank Indonesia’s balance between sustaining growth, maintaining currency stability, and keeping inflation under control, signaling proactive policy management amid evolving domestic and global conditions.
