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.
Indonesia is poised to deliberate an interest rate cut in December as the nation’s economy grapples with the aftermath of the COVID-19 pandemic. The potential adjustment comes amidst global economic uncertainties and fluctuating inflation rates. The central bank, Bank Indonesia, is considering the move to stimulate economic growth, boost consumer spending, and support businesses still recovering from the challenging economic landscape of recent years.
A possible rate cut could have numerous implications for Indonesia’s economy. Lower interest rates typically reduce borrowing costs, making loans more affordable for consumers and businesses. This can lead to increased investments and spending, providing a much-needed boost to various sectors, including manufacturing, retail, and services. However, the central bank must balance this with the risk of inflation and ensure that the economic stimulus does not lead to increased prices or financial instability.
As December approaches, all eyes will be on Bank Indonesia’s decision. Policymakers will likely consider a range of economic indicators, including inflation trends, currency stability, and global economic conditions. An interest rate cut could signal a proactive stance towards economic recovery and growth, demonstrating the central bank’s commitment to navigating Indonesia through these turbulent times. The outcome will undoubtedly have significant repercussions for Indonesia’s economic trajectory into 2024.
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