Recent Interest Rate Cuts: A Boost to Economic Growth?
Bank Indonesia, the country’s central bank, recently announced a cut in its benchmark interest rate, known as the BI Rate, from 5.00 percent to 4.75 percent. This move aims to stimulate national economic growth. In addition to cutting the BI Rate, the central bank also lowered its deposit facility and lending facility rates by 0.25 percent to 3.75 percent and 5.50 percent, respectively.
Current Easing Cycle in Indonesia
The current easing cycle in Indonesia is depicted in Chart A. The BI Rate has been gradually yet aggressively cut from 6.25 percent in August 2024 to 4.75 percent. This significant reduction in interest rates is expected to boost economic growth by increasing demand for credit and accelerating economic activity.
Chart A: Bank Indonesia’s Benchmark Interest Rate 2015-2025
The chart shows the trend of the BI Rate over the past decade, highlighting the recent cuts. While the reduction in interest rates may seem surprising, it is likely a response to the political and social unrest in Indonesia, which has prompted the government to push for more stimulus to boost economic growth.
Impact of Interest Rate Cuts on the Economy
The interest rate cuts are expected to have both positive and negative effects on the economy. On the one hand, lower borrowing costs should lead to higher demand for credit, accelerating economic activity. On the other hand, a weakening rupiah exchange rate, which has been further weakening, can have negative impacts on inflation and debt, posing concerns for overall economic stability.
Credit Growth and the Federal Reserve
Credit growth in Indonesia has been subdued, with a year-on-year growth rate of 7.56 percent in August 2025. Bank Indonesia Governor Perry Warjiyo has urged banks to cut their interest rates to boost credit growth. Meanwhile, the US Federal Reserve has also cut its key interest rate, which is expected to reduce external pressures on Indonesia’s economy. The Federal Reserve’s rate cut is likely to lead to an influx of capital into emerging markets like Indonesia, strengthening the rupiah and stabilizing its exchange rate.
Federal Reserve’s Interest Rate Cut
The Federal Reserve’s decision to cut its interest rate by 0.25 percentage point is seen as a cautious move, aiming to avoid the perception of being influenced by politics. The Fed has signaled that two more rate cuts are on the horizon before the end of 2025, which is positive news for Bank Indonesia and the Indonesian economy.
Conclusion
In conclusion, the recent interest rate cuts by Bank Indonesia and the Federal Reserve are expected to have a positive impact on Indonesia’s economy. While there are concerns about the weakening rupiah exchange rate, the reduction in interest rates should lead to higher demand for credit and accelerated economic activity. As the global economy continues to evolve, it will be interesting to see how these interest rate cuts play out and affect the overall economic landscape.
