Bank Indonesia surprises markets with a cut in August

Rates down to near-three-year low: At its meeting on 19–20 August, Bank Indonesia (BI) decided to lower the BI-Rate by 25 basis points to 5.00%, mirroring July’s cut and going against market expectations of a hold. The BI-Rate now stands at its lowest level since October 2022, after 125 basis point reductions over the past year.

BI shifts to a pro-growth stance: BI justified the cut by noting that core inflation is low and overall inflation should stay within target this year and next, the rupiah remains resilient and more stimulus is needed to support growth. Moreover, BI was concerned about the transmission of previous rate cuts to the economy, which likely further incentivized the unexpected rate reduction.

BI to cut again by December: Bank Indonesia indicated that it will continue to evaluate the potential for further interest rate reductions to bolster economic growth. The majority of our panelists expect at least 25 basis points of further rate cuts by December, as inflation remains in range and GDP growth falls short of the official 5.2% target. The rest of our panelists see rates on hold for the remainder of 2025 amid elevated economic and trade uncertainty. The Bank will reconvene on 16–17 September.

Panelist insight: Nomura analysts said: “We change our forecast and now expect BI to cut by an additional 75bp in this cycle, taking the policy rate to 4.25%. […] We believe [August’s] decision and the still-dovish tone mark a pivot by BI to a much more pro-growth focus, signalling it is looking to shift to a significantly accommodative stance. […] In terms of timing, which we acknowledge remains subject to much uncertainty due to the external backdrop, we believe it would be more plausible for BI to deliver these additional rate cuts in tandem with the Fed, in order to keep interest rate differentials stable, which would then allow BI to continue to promote its FX stability goal. As a result, we pencil in a 25bp cut by BI each in September, December and March 2026.”

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