The central bank has cut 150 basis points since its easing cycle in September last year.
[JAKARTA] Bank Indonesia (BI) unexpectedly cut its benchmark interest on Wednesday (Sept 17), its third straight reduction since July, defying the recent rupiah volatility triggered by street protests and a Cabinet reshuffle.
Governor Perry Warjiyo said the move backs the government’s push to accelerate economic growth by urging banks to swiftly cut lending and deposit rates and to step up loan disbursements.
BI cut its benchmark rate by 25 basis points to 4.75 per cent, defying a Bloomberg consensus that had expected no change. The central bank also lowered the deposit facility rate by 50 basis points to 3.75 per cent, and trimmed the lending facility rate by 25 basis points to 5.5 per cent.
The central bank has cut 150 basis points since its easing cycle in September last year.
The cut followed newly appointed finance minister Purbaya Yudhi Sadewa’s decision to reallocate 200 trillion rupiah in idle government funds from the central bank to state-owned lenders. The measure aims to boost liquidity and drive credit growth.
Warjiyo said the central bank fully supports the government’s measures, noting that they complement BI’s own efforts.
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“We have gone all out with pro-growth policies while maintaining stability,” he said in a briefing, adding that BI would continue to seek room for further rate cuts while keeping an eye on rupiah stability and inflation.
Warjiyo said global developments remain a key concern for BI, which cut its benchmark rate a day ahead of the US Federal Reserve’s policy meeting, anticipating the Fed’s widely expected rate cut.
Indonesia recently roiled markets with a series of political developments, including the large-scale protests and the replacement of long-serving finance minister Sri Mulyani Indrawati with Purbaya, an economist.
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The move rattled investors, sending Jakarta’s benchmark index lower and making the rupiah the worst-performing Asian currency last month, amid concerns that the new finance minister’s pro-growth agenda could widen the budget deficit.
Concerns have also emerged over the central bank’s independence after a “burden-sharing” agreement, under which BI would help finance government programmes.
IDR bonds have since recovered from recent volatility, though DBS economists noted that gains may be limited as markets continue to assess the fiscal implications of the new finance minister’s growth plans.
Radhika Rao, senior economist at DBS, said Indonesian policymakers expect the ID-US benchmark rate differential to widen following the Fed’s move, giving BI more room to ease domestic rates further in the fourth quarter this year.
“Softer US dollar bias is also expected to counter the scale of rupiah weakness, beyond knee-jerk moves,” she said.
Ample domestic real rates give the central bank room to stay accommodative, she noted, while persistent food inflation is seen as temporary and supply-driven, making it less sensitive to rate changes.
Sluggish loan growth
South-east Asia’s largest economy is facing weakening consumption and a rising number of layoffs, exacerbated by the looming threat of a 19 per cent US tariff, which has significantly dampened business confidence.
BI noted that many businesses remain cautious, and taking a wait-and-see stance on their expansion plans.
This caution is reflected in 2,372.1 trillion rupiah of undisbursed loans, accounting for 22.7 per cent of the banking sector’s total credit ceiling, pointing to weak demand for working capital, particularly in the manufacturing and mining industries.
Bank loan growth rose year on year to 7.56 per cent in August from 7.03 per cent in July, but still remain below the central bank’s target.
Warjiyo said the central bank expects its series of six rate cuts since last year to help unlock this idle loan, projecting bank lending growth of 8 to 11 per cent in 2025.
Earlier this week, the government unveiled a stimulus package worth nearly US$1 billion for the fourth quarter, including food handouts and an infrastructure building programme that could create jobs.
