Bank Indonesia Cuts Reference Interest Rate to 6% in September 2024

Bank Indonesia (BI) has lowered its benchmark interest rate, the BI 7-Day Reverse Repo Rate (BI7DRR), by 25 basis points (bps) to 6%. This decision was made following a Board of Governors meeting (RDG) held on September 17-18, 2024.

Simultaneously, the deposit facility interest rate decreased by 25 bps to 5.25%, and the lending facility interest rate also fell by 25 bps to 6.75%.

BI stated that the reason for the reduction is consistent with the persistently low inflation forecast for 2024 and 2025, remaining within the target of 2.5±1%. Other factors include the strengthening and stability of the Rupiah exchange rate, and the need to bolster economic growth.

"Going forward, Bank Indonesia will continue to monitor the scope for further policy interest rate cuts in line with the forecast of persistently low inflation, a stable and strengthening Rupiah exchange rate, and economic growth that needs to be further stimulated," BI wrote on its website on Wednesday (September 18, 2024).

This is the first rate cut since the beginning of 2024. The benchmark interest rate last stood at 6% in March 2024.

BI acknowledged that uncertainty surrounding the monetary policies of advanced economies is easing as global inflationary pressures continue to decelerate. It noted that inflation in the United States (US) is expected to approach its medium-term target of 2% amid slowing economic growth and rising unemployment.

"These developments are driving prospects for a faster and larger reduction in the Fed Funds Rate (FFR) than previously anticipated," BI wrote.

In Europe, the European Central Bank (ECB) has lowered its monetary policy interest rates in line with declining inflation towards its medium-term target of 2%.

Meanwhile, in Asia, the People's Bank of China (PBoC) has also lowered interest rates in response to low inflation and persistently weak domestic demand.

Another key point highlighted by BI is that Indonesia's economic growth remains robust and needs to be further stimulated.

"Investment continues to grow, particularly in construction, in line with the final stages of operationalization of the Nusantara Capital City (IKN) and the completion of various National Strategic Projects (PSN)," BI claimed.

Furthermore, the Rupiah exchange rate has strengthened, supported by the consistency of Bank Indonesia's monetary policy mix and increased foreign capital inflows. BI stated that the Rupiah exchange rate had strengthened to Rp15,330/USD by September 17, 2024, representing a 0.78% appreciation compared to its position at the end of August 2024.

This strengthening of the Rupiah is higher than the appreciation of regional currencies such as the South Korean won and the Indian rupee, which strengthened by 0.32% and 0.13%, respectively.

BI also mentioned that inflation remains low and within the target range of 2.5±1%. The Consumer Price Index (CPI) inflation was recorded low across all components, reaching 2.12% (yoy) in August 2024.