Introduction to Interest Rate Cuts
Indonesia’s central bank, Bank Indonesia (BI), has made a surprising move by cutting its interest rate. This decision was made to boost the country’s economic growth. The interest rate was cut by 25 basis points to 4.75%, which is the lowest it has been since late 2022.
The Reason Behind the Cut
All 31 economists surveyed by Reuters expected no change in the interest rate after the previous cut in July and the unexpected easing in August. However, the central bank decided to cut the rate to support economic growth. Governor Perry Warjiyo stated that the bank would continue to assess the need for further cuts, which is in line with economists’ expectations for more monetary loosening.
Balancing Economic Growth and Currency Stability
BI has to balance the need to keep the rupiah currency stable while supporting economic growth during the easing cycle. Mr. Warjiyo explained that the economic growth is still below the national capacity, so demand needs to be pushed. He added that the bank has been going "all out" to support economic growth while maintaining financial market stability.
Market Reaction
The decision to cut the interest rate had a positive impact on the stock market, which hit a record high. The rupiah also firmed slightly. However, the rupiah is still one of the worst-performing currencies in emerging Asia, having dropped 2% against the US dollar.
Challenges Facing the Economy
The country is facing challenges such as concerns over domestic finances and central bank independence. There have been protests and unrest in many cities, and the abrupt sacking of the respected finance minister, Sri Mulyani Indrawati, has also added to the uncertainty. Additionally, the "burden sharing" deal that will see BI help fund state programs has raised concerns about the central bank’s independence.
Proposed Changes to the Bill
Parliament is discussing changes to an existing Bill that could strengthen the requirement of the central bank to support growth. The proposed changes could also give the bank the power to recommend the removal of the bank’s governor. This has raised concerns about the central bank’s independence and its ability to make decisions without political interference.
Current State of the Economy
The economy grew 5.1% in the second quarter from a year earlier, which is the fastest pace in two years. However, there are signs of slowing in the third quarter. The new finance minister, Purbaya Yudhi Sadewa, has criticized BI for keeping banking liquidity "dry", which has restricted bank lending.
Response from the Central Bank
In response to the criticism, Mr. Warjiyo said that liquidity is ample, but demand for credit has been weak as businesses are in a wait-and-see mode. He also urged commercial banks to follow BI’s lead in cutting rates, highlighting that their lending rates have fallen only 7 basis points so far in 2025.
Conclusion
In conclusion, the interest rate cut by Bank Indonesia is a move to support economic growth. However, the country is facing challenges such as concerns over domestic finances and central bank independence. The proposed changes to the Bill could also have an impact on the central bank’s independence and its ability to make decisions. The central bank’s decision to cut the interest rate has had a positive impact on the stock market, but the rupiah is still one of the worst-performing currencies in emerging Asia. Overall, the economy is growing, but there are signs of slowing, and the central bank’s decisions will be crucial in determining the country’s economic future.
