Bank Indonesia Cuts Interest Rate to 5.75% at the Beginning of 2025

Bank Indonesia (BI) has cut its benchmark interest rate, the BI 7-Day Reverse Repo Rate (BI7DRR), by 25 basis points (bps) to 5.75%. This decision was made during a Board of Governors meeting on January 14-15, 2025.

Consequently, the deposit facility rate was also lowered by 25 bps to 5%, and the lending facility rate decreased by 25 bps to 6.50%.

BI stated that this decision is in line with the low and controlled inflation projections for 2025 and 2026, remaining within the target of 2.5±1%, and the stability of the Rupiah exchange rate, which is consistent with its fundamentals to control inflation within its target. Furthermore, the cut is considered an effort to stimulate economic growth.

BI will implement a loose macroprudential policy to increase bank credit or financing to priority growth sectors and job creation, including MSMEs and the green economy, through strengthening the macroprudential liquidity incentive policy (KLM) strategy starting in January 2025.

BI explained that the divergence in global economic growth is widening, and uncertainty in global financial markets continues. BI acknowledged that the US economy grew stronger than projected, supported by fiscal stimulus that boosted domestic demand and increased investment in technology, leading to higher productivity.

"Conversely, the economies of Europe, China, and Japan remain weak, influenced by declining consumer confidence and constrained productivity, while the Indian economy is still hampered by the limited manufacturing sector," BI said in its press release on Wednesday, January 15, 2025.

Meanwhile, in Indonesia, economic growth has been lower than previously forecast. Economic growth in Q4 2024 was slightly below projections, influenced by lower domestic demand, both consumption and investment. Overall, economic growth in 2024 is predicted to be slightly below the midpoint of the 4.7-5.5% range.

"In 2025, economic growth is also expected to be lower than previously forecast. Exports are projected to be lower due to the slowing demand from major trading partners, except for the US," BI wrote.

BI noted that household consumption remains weak, particularly among the lower and middle classes, due to weak income expectations and job availability.

"At the same time, the impetus for private investment is also not yet strong due to the still larger production capacity to meet demand, both domestically and for export," BI stated.

BI forecasts Indonesian economic growth in 2025 to reach the range of 4.7-5.5%, slightly lower than the previous forecast range of 4.8-5.6%.

The weakening exchange rate is claimed to be still under control despite high global uncertainty. However, the exchange rate against the US dollar weakened by 1% (point-to-point) from the end-2024 level until January 14, 2025.

BI compared this to other regional currencies, such as the Indian Rupee, Philippine Peso, and Thai Baht, which weakened by 1.20%, 1.33%, and 1.92%, respectively.

"Conversely, the Rupiah exchange rate strengthened against the currencies of developed countries outside the US dollar and remained stable against the currencies of developing countries," BI said.