Central bank of Indonesia unveils unexpected reduction in interest rate

Bank Indonesia Lowers Interest Rate for Fifth Time in Nine Months

In a surprise move, Bank Indonesia, the country's central bank, has reduced the seven-day reverse repurchase rate by 25 basis points to 5%. This decision was unexpected, as economists had predicted that the central bank would not make a rate cut this time around.

The rate reduction, which is the lowest since late 2022, is aimed at promoting economic growth. Indonesia recorded more than 5% growth in the second quarter of the year, but Bank Indonesia has projected that economic growth will be slower in 2025 compared to the previous year.

The London-based business research centre, Capital Economics, described the rate cut as a surprise. Jason Tuvey, an analyst at Capital Economics, wrote that there's scope for more easing over the rest of the year. He expects the seven-day reverse repurchase rate to be lowered to 4.50% by the end of the year.

The stability of the rupiah was a factor in the rate reduction decision. Inflation remains subdued according to Capital Economics, which also believes that GDP growth is likely to slow. Capital Economics expects more rate cuts could be made over the rest of the year.

This is the fifth rate cut since September. Prabowo's government set an ambitious goal of 8% growth when they took office last year, but the economy has faced challenges, including the impact of the pandemic and geopolitical tensions. The rate cut by Bank Indonesia is consistent with the continued low inflation forecast for 2025 and 2026.

Economists are divided on the impact of the rate cut. While some believe it will help stimulate economic growth, others are concerned that it could lead to increased inflation and currency volatility. Only time will tell whether the rate cut will help achieve the government's growth targets.