Indonesia resumes rate cuts as growth outlook dims, rupiah gains

Free Malaysia Today

21-05-2025

Bank Indonesia has been closely monitoring the rupiah as Washington continues to negotiate tariffs with trading partners. (Reuters pic)
JAKARTA : Indonesia's central bank cut its benchmark interest rate (BI-Rate) for a second time this year to bolster the economy in the face of global trade tensions and recent gains in the local currency.
Bank Indonesia (BI) reduced the BI-Rate by 25 basis points to 5.5% today, its lowest level since 2022.
Twenty-two of 35 economists in a Bloomberg survey predicted the central bank's move, while the rest expected policymakers to stand pat as they have done since easing in January.
The decision comes weeks after Indonesia reported the slowest gross domestic product growth in three years, while the rupiah has strengthened in the past month along with many Asian currencies.
The planned 32% tariff on Indonesian exports to the US piles on tepid domestic consumption and weak state revenue that has forced a cutback in government spending in Southeast Asia's largest economy.
Indonesia's economy needs to further strengthen, and interest rates need to come down to support growth, governor Perry Warjiyo said at the briefing, after slightly lowering the estimate for this year's GDP growth to a range of 4.6% to 5.4%.
'Second quarter indicators show that various sectors are in need of support,' he said.
Multiple analysts in the past weeks have also slashed their growth estimates to under 5% level this year, well below the 8% pace that President Prabowo Subianto wants to see during his term.
'At the same time, the rupiah is stable with a tendency to strengthen,' Warjiyo said, citing improving sentiment and BI's sustained intervention measures.
BI joins central banks around the region in loosening monetary policy to shore up their economies from the trade war fallout.
Singapore, Thailand and the Philippines eased in April. Malaysia stood pat this month but lowered reserve requirements to encourage more lending while the governor signaled that the central bank has room to act if needed.
Giving the central bank some room to maneuver is the rupiah's recent rebound as the de-escalation of tariff tensions between the US and China spurs risk-on sentiment.
The rupiah has gained almost 3% since it touched a record low on April 9, supported by foreign inflows into equities and government bonds.
However, BI will still closely monitor the currency as Washington continues to negotiate tariffs with trading partners – including Indonesia – and as the Federal Reserve is seen to deliver fewer rate cuts this year.
On the local front, seasonal outflows from dividend payments and maturing foreign debt this quarter could also pressure the rupiah.
Other highlights from the briefing:
Inflation to stay within 1.5% to 3.5% this year and next.
Bank lending is now forecast to grow 8%-11% from a previous estimate of 11%-13% expansion, after credit growth cooled at the slowest pace in two years.
The central bank continues to buy government bonds in secondary market.