Indonesian Macro Update - BI Rate Update 16 Jan 2025
KBVS MACRO UPDATE
Thursday, 16 January 2025
Unexpectedly, BI Rate Lowered by 25 bps
In a surprising move, Bank Indonesia (BI) adopted a pro-growth stance by reducing the BI Rate by 25 bps to 5.75% (Cons: 6.00%, KBVS: 6.00%, Prev: 6.00%). The shift in policy from pro-stability to pro-growth reflects BI's intent to stimulate the economy. The decision also takes into account Indonesia's inflation, which reached a record low of 1.57% YoY in Dec ‘24.
However, challenges remain. Indonesia's trade surplus for 4Q24 stood at only USD9.18 bn, and the current account deficit (CAD), ongoing since 2Q23, persists as a key concern. Although BI projects the CAD to remain between 0.5%-1.3% of GDP, the narrowing interest rate differential between the BI Rate and the Federal Reserve's rate—now at just 125 bps—has increased the risk of Rupiah depreciation. This concern materialized shortly after the announcement, with the JISDOR Rupiah weakening to IDR 16,311 per USD (Prev: IDR 16,265 per USD) by Jan 15, 2024.
While the adoption of a more inward-looking monetary policy may elevate short-term risks of capital outflows and Rupiah volatility amidst global imbalances and a flight to quality, the move could yield positive long-term impacts. It provides an opportunity to foster investment optimism and strengthen consumer purchasing power, paving the way for sustained economic growth. As BI navigates these trade-offs, its decision underscores the delicate balance between addressing immediate market dynamics and nurturing an environment conducive to robust, inclusive growth.
Regards,
KBVS Research Team