Indonesia Macro Update - BI Rate Update 22 May 2025
KBVS MACRO UPDATE
Thursday, 22 May 2025
BI Rate has been lowered to 5.50% : A Shift Toward More Accommodative Policy
Bank Indonesia (BI) has lowered its benchmark interest rate by 25bps to 5.50% (prev: 5.75%), marking a shift toward a more accommodative policy stance. The domestic macroeconomic backdrop also supported the policy adjustment. Inflation remained subdued at 1.95% yoy in April 2025—comfortably within BI’s target range of 2.5% ±1%. The low headline figure was largely driven by a moderate increase in volatile food prices at 0.64% yoy supported by the adequate supply of key food commodities and strong synergy in inflation control by the Central/Regional Inflation Control Teams (TPIP/TPID) through the National Movement for Food Inflation Control (GNPIP), while core inflation remained stable at 2.5% yoy, in line with the consistency of Bank Indonesia's policy to guide inflation expectations. Simultaneously, GDP expanded by 4.87% yoy in 1Q25, driven by seasonal momentum from New Year and Eid festivities.
Within the banking sector, liquidity pressures have emerged as growth in third-party funds (DPK) moderated to 4.55% yoy in April (prev: 5.51% yoy in Jan '25), intensifying competition for funding. Meanwhile, credit growth currently stands at 8.88% yoy, and BI forecasts it to reach 8–11% in FY25 (vs 11-13% prev).
We expect Bank Indonesia (BI) to continue steering its monetary policy to maintain inflation within its target range due to the synergy in inflation control between Bank Indonesia and the Central and Regional Governments and stabilize the exchange rate in line with fundamentals by strengthening stabilization policy responses, including calibrated interventions in the offshore NDF market and the triple intervention strategy involving spot transactions, DNDFs, and SBN in the secondary market, while remaining attentive to opportunities for promoting economic growth in response to both global and domestic dynamics. Bank Indonesia will also optimize monetary instruments, including strengthening the pro-market monetary operations strategy through the optimization of SRBI, SVBI, and SUVBI instruments, to enhance the effectiveness of policies in attracting foreign portfolio investment inflows and supporting the stability of the Rupiah exchange rate. One key area BI needs to monitor going forward is the use of SRBI once rupiah stability is achieved.
Regards,
KBVS Research Team