Bank Indonesia Keeps Interest Rates Unchanged
Introduction to the Decision
Bank Indonesia (BI) has decided to keep its interest rates unchanged for the second consecutive policy review. This decision was made to maintain stability in the economy, particularly with the rupiah coming under renewed pressure. The benchmark 7-day reverse repurchase rate remains at 4.75%, as predicted by the majority of economists polled by Reuters. The overnight deposit and lending rates were also left unchanged.
Background on Interest Rate Cuts
BI has cut its main rates by a total of 150 basis points since September 2024, aiming to stimulate growth in Southeast Asia’s largest economy. The goal of these cuts is to boost economic activity and support the country’s growth targets.
Rupiah Stability as a Priority
According to Governor Perry Warjiyo, the decision to keep interest rates unchanged is in line with BI’s short-term focus on safeguarding the rupiah. The rupiah has been under significant pressure, trading near an all-time low earlier this week. Excessive volatility in the rupiah could harm trade, investment, and inflation, making its stability a top priority for BI.
Future Rate Cuts
Policymakers will continue to monitor policy transmission, ensuring that previous rate cuts filter down to households and businesses. Warjiyo indicated that BI will watch for future opportunities to resume its rate-cutting cycle, depending on domestic and global conditions. The economy is still growing below its capacity, and inflation is expected to remain within BI’s target range until 2026.
Economic Growth and Targets
Indonesia’s economic growth slowed slightly in the third quarter to an annual 5.04%, making it challenging for the government to achieve its full-year target of 5.2%. The government has launched fiscal stimulus measures to raise 2026 growth to 5.4% and eventually meet President Prabowo Subianto’s 2029 target of 8%.
Impact of Rupiah Weakness
The rupiah has fallen nearly 4% against the U.S. dollar this year, making it the worst-performing emerging Asian currency. After BI’s decision, the currency extended gains slightly to strengthen 0.33%. Economists believe that the decision to hold interest rates is reasonable for maintaining the rupiah’s stability, given the uncertainty around the Fed rate cut in December and global stock instability.
Collaboration with the Finance Minister
To increase policy synergy, BI will invite the finance minister to attend its monthly policy review starting this month. This move comes after concerns over BI’s independence following President Prabowo’s dismissal of long-serving Finance Minister Sri Mulyani Indrawati in September. The new finance minister, Purbaya Yudhi Sadewa, has been critical of BI’s policies, including keeping liquidity too tight.
Measures to Ease Dollar Demand
To ease U.S. dollar demand, BI plans to issue new monetary operation instruments in the Chinese yuan and Japanese yen, as well as develop money market instruments in those currencies. This move aims to reduce the country’s reliance on the U.S. dollar and promote the use of other currencies in international transactions.
Conclusion
In conclusion, Bank Indonesia’s decision to keep interest rates unchanged is a cautious approach to maintaining economic stability, particularly with the rupiah under pressure. While the economy is still growing below its capacity, BI is taking a wait-and-see approach, monitoring domestic and global conditions before making further moves. The collaboration with the finance minister and measures to ease dollar demand are positive steps towards achieving the country’s economic growth targets and promoting financial stability.
