Bank Indonesia (BI) made a surprising move by lowering its benchmark interest rate, or BI-Rate, by 25 basis points to 5.75% in January 2025. Alongside this, the central bank also reduced the deposit facility rate to 5% and the lending facility rate to 6.5%. 

 

“This decision aligns with the low inflation forecast for 2025 and 2026, which remains under control within the target range of 2.5% plus or minus 1%,” said BI Governor Perry Warjiyo during a press conference in Jakarta on Wednesday, January 15. 

 

Perry explained that this decision was based on a comprehensive assessment of global and domestic economic conditions and projections. He further stated that the rupiah exchange rate remains stable and that the reduction in the BI-Rate is expected to help maintain inflation within the target range. 

 

Contrary to Economists’ Predictions 

 

BI's decision defied the expectations of several economists. Previously, Bank Permata’s Chief Economist, Josua Pardede, had projected BI would maintain its benchmark interest rate at 6% in January 2025. Despite inflation being within BI’s target, pressure on the rupiah exchange rate was a key consideration. 

 

“Capital outflows reached USD 0.75 billion between mid-December 2024 and mid-January 2025. This caused the rupiah to depreciate by about 1% throughout January 2025,” said Josua. As of January 14, the rupiah exchange rate stood at around IDR 16,265 per US dollar. 

 

The Institute for Economic and Social Research, Faculty of Economics and Business, University of Indonesia (LPEM FEB UI) also predicted that BI would maintain its benchmark rate. Macroeconomics and financial markets researcher at LPEM FEB UI, Teuku Riefky, highlighted the significant pressures faced by the rupiah due to external factors. 

 

“One of the main factors is the expectation of a more cautious monetary policy from the Federal Reserve, driven by persistent inflationary pressures in the US, as well as the direction of the upcoming Donald Trump administration’s policies,” Riefky stated. 

 

According to Riefky, there is currently a 93.1% probability that the Federal Reserve will maintain its interest rate. He noted that these external dynamics limit Bank Indonesia’s flexibility to cut its benchmark rate, as such a move could exacerbate capital outflows and further weaken the rupiah. 

 

“Given these considerations, we believe Bank Indonesia should maintain the BI-Rate at 6% during its first Board of Governors meeting in 2025,” Riefky added. 

 

Rupiah Closes Weaker 

 

The rupiah weakened to IDR 16,325 per US dollar after Bank Indonesia (BI) cut its benchmark interest rate (BI-Rate) to 5.75% in January 2025. According to Bloomberg data, the rupiah closed 55.50 points lower, or 0.34%, on Wednesday afternoon, January 15. 

 

Lukman Leong, an analyst at Doo Financial Futures, explained that the rupiah’s movement was influenced by external factors, particularly economic developments in the US and China. Although the US dollar index weakened due to Producer Price Index (PPI) data, the rupiah had already shown signs of depreciation since the market opened. 

 

“BI appears to be concerned about economic developments, which led to the rate cut,” Lukman said. This reduction in the BI-Rate had been anticipated by investors. 

 

Additionally, Indonesia’s relatively weak trade data drew attention. Although imports rose more than expected, reflecting stronger domestic demand, export values and the trade surplus fell short of market expectations. 


Original article here

This article is published in partnership with Katadata