Indonesia: Potential Interest Rate Reduction This December
Bank Indonesia is expected to cut its rate to 6.00% once this year, prioritizing rupiah stability. Easing may occur later as President Prabowo takes office and the Fed lowers rates.
Key View
- We hold on to our view that Bank Indonesia will only cut once to 6.00% this year.
- BI governor still sounded more hawkish than expected despite the conditions for an early cut being met. This is an indication that the Bank will likely want to see a more sustained rally in the rupiah before making its move.
- More room for easing will open up by year’s end after President Prabowo assumes office in October and the US Federal Reserve cuts its benchmark rate the second time. However, risks are skewed towards an earlier move if the rupiah strengthens more convincingly against the dollar during that time.
Bank Indonesia (BI) left its benchmark policy rate unchanged at 6.25% during its August meeting, which comes as no surprise to us. Indeed, it is our long-held view that BI will not consider cuts ahead of the US Federal reserve (Fed) as the stability of the rupiah remains at the fore of the Bank’s concerns. We were right in this regard. The conditions to embark on policy easing have already been met, yet policymakers remain reluctant to act. Consequently, our projections for a 25 basis point (bps) cut by the end of 2024, followed by an additional 100 bps reduction in 2025, remain unchanged.
In December, Indonesia’s central bank may consider cutting interest rates as part of its broader strategy to stimulate the economy. The Bank Indonesia (BI) has been monitoring various economic indicators, including inflation rates and economic growth, to determine the opportune moment for such a move. The potential rate cut aims to encourage borrowing and investment, particularly in sectors that have been impacted by the global economic slowdown and domestic challenges, such as post-pandemic recovery.
Analysts suggest that a reduction in interest rates could provide much-needed relief to businesses and consumers in Indonesia. Lower borrowing costs may lead to increased spending and investment, bolstering economic activity and helping to sustain growth. This situation is critical, especially as the country navigates through uncertainties in global trade and fluctuating commodity prices.
Should the BI decide to proceed with the interest rate cut, it would reflect a proactive approach to fostering an environment conducive to recovery and growth. With the right economic policies in place, Indonesia could position itself for a more resilient future, enabling it to better withstand external shocks.
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