Indonesia: Bank Indonesia shifts stance, stuns markets with January rate cut
Central Bank delivers first rate cut since September: At its meeting on 14–15 January, Bank Indonesia (BI) cut the BI-Rate by 25 basis points to 5.75% after standing pat for three consecutive meetings. The move caught markets by surprise, as another hold had been priced in to shore up the rupiah.
Weaker economic outlook motivates cut: BI’s unexpected decision was aimed at bolstering the Indonesian economy; President Prabowo Subianto recently raised the full-year GDP growth target to 8%, well above the 5% average of recent years. In a press briefing, Governor Perry Warjiyo stated that the Bank had shifted its stance to pro-stability and growth, after it had focused on supporting the rupiah at the end of 2024. Warjiyo also stated that BI will continue coordinating with the government to support economic activity in line with the president’s policy priorities.
With regard to price dynamics, BI projects inflation to remain within the 1.5–3.5% target corridor in both 2025 and 2026, giving further room for the cut. Meanwhile, the bank expects currency volatility to be capped by robust GDP growth, attractive bond yields and increased clarity around the policy agenda of Donald Trump.
Further rate cuts expected this year: In its communique, BI stated that it will continue to focus on maintaining inflation within target and supporting the rupiah, while also considering “further room for monetary easing to also drive economic growth in line with global and national economic dynamics”. Virtually all of our panelists expect further rate cuts before the end of 2025, with the next one likely in Q2. Rupiah volatility and stronger-than-expected price pressures pose upside risks to the policy rate, while the U.S. Fed’s policy stance is a bi-directional risk.
The Bank will reconvene on 18–19 February.
Panelist insight: United Overseas Bank analyst Enrico Tanuwidjaja commented:
“Based on MPC rate decision on 15th Jan, we revised our forecast to 2x25bps rate cut, each in 2Q25 and 3Q25 to 5.25% and then stay at that level throughout the rest of the year. Nevertheless, again based on 15 Jan MPC, we would like to emphasize more on the extent of the eventual rate cuts rather than focusing on the exact timing of rate cut delivery.”
EIU analysts held a more hawkish view:
“We maintain that BI will make small changes to avoid putting too much pressure on its currency. We continue to expect the central bank to enact the next interest-rate cut only in the third quarter of 2024, leaving the rate at 5.5% by end-2025. BI will mirror the Fed’s decision to only cut its policy rate twice in 2025. Although we do not expect BI to return to policy tightening, we believe that there is a 30% probability of a rate cut in the second quarter of 2025 if inflation remains subdued and the rupiah regains strength against the dollar.”