Indonesia central bank keeps policy interest rate at 5.75%, for now

SINGAPORE (ICIS)–Indonesia’s central bank left its policy interest rate unchanged at 5.75% on 19 February, citing elevated global uncertainty, but sees room for monetary policy easing down the road.

• US tariffs a concern
• Timing of future interest rate cuts depends on dynamics
• 2025 GDP growth projected at 4.7% to 5.5%

Bank Indonesia’s (BI) decision is consistent with keeping inflation within its 1.5-3.5% target, stabilizing the rupiah that it is consistent with fundamentals and contributing to driving economic growth, it said on 19 February.

The deposit facility (DF) interest rate was kept at 5.00% and the lending facility (LF) interest rate remained at 6.50%.

The rupiah remains “under control” and expects the exchange rate to be supported by its stabilization policies, attractive yields, low inflation, and good economic growth prospects, the central bank said.

In January, the central bank issued a surprise rate interest rate cut to support economic growth amid expectations of continued low inflation in 2025 and 2026. The move had sent the rupiah tumbling to a six-month low against the US dollar.

Global financial market uncertainties, however, “remains high” – particularly, the US’ tariff policy and the US Federal Reserve’s monetary policy direction.

Threats of US tariffs have been keeping the US dollar strong, exerting downward pressure on most Asian currencies, which limits the ability of central banks in the region to cut interest rates to boost GDP growth.

BI governor Perry Warjiyo said that BI continues to see room for lowering rates but stressed that the timing is important and will depend on global dynamics.

Nomura Global Markets Research maintains its forecast that BI will keep the policy rate at 5.75% for the remainder of 2025, citing persistent external risks, particularly from the “relatively aggressive implementation of US tariffs under Trump 2.0.”

Indonesia’s consumer inflation rate eased to 0.76% in January from 1.57% in the previous month. Core inflation, which excludes volatile food and energy prices, remained steady at 2.36% from December.

STRONG 2024 GROWTH SETS STAGE FOR CONTINUED EXPANSION
Indonesia’s economy this year is still projected to grow at 4.7-5.5%, driven by increased investment, BI said, while emphasizing the need to further boost household consumption and strengthen exports.

In 2024, southeast Asia’s biggest economy posted a 5.03% growth on the back of strong domestic demand – particularly, household consumption and investment – with Q4 annualized growth accelerating to 5.02% from 4.95% in the third quarter.

Manufacturing and trade were the key growth contributors, supported by sustained domestic demand.

Indonesia’s robust balance of payments (BOP) continues to bolster its external resilience, with a projected surplus for 2024, with its current account deficit offset by a sustained capital and financial account surplus.

This positive trend continued into January 2025, with a bigger trade surplus of $3.5 billion made possible by export growths across key commodities.

Notably, exports of precious metals and jewelry/gems, chemical products, and rubber and rubber products all contributed to this growth.

Indonesia’s overall exports for the month grew by 4.68% year on year to $21.5 billion, while overall imports shrank by 2.67% to $18 billion.

“In 2025, BOP performance will be supported by a manageable current account deficit in the 0.5-1.3% of GDP range,” BI said.

Indonesia is a net importer of several petrochemicals, including polyethylene (PE) and polypropylene (PP); while it is a major exporter of crude palm oil (CPO) and its downstream oleochemicals.

The country has the biggest palm plantation in the world.

RUPIAH FARES BETTER THAN ASIAN PEERS
Despite global financial market uncertainties, the Indonesian rupiah has remained relatively stable, underpinned by Bank Indonesia’s policy of maintaining interest rates for now amid an uncertain economic outlook.

The rupiah inched up by 0.2% against the US dollar in H1 February, but was down 1.06% from end-December 2024, according to the Indonesian central bank.

While stable against a basket of currencies of developing economies economy, the rupiah appreciated against currencies of most advanced economies, excluding the US, it said.

Focus article by Nurluqman Suratman