By: Bara Winatha*)
Bank Indonesia (BI) has officially taken a strategic step in responding to domestic and global economic dynamics by lowering the benchmark interest rate or BI Rate by 25 basis points to 5.50 percent. This step was taken based on the results of the Board of Governors Meeting (RDG) held on May 20-21, 2025. The BI Rate reduction was also accompanied by a cut in the deposit facility interest rate to 4.75 percent and the lending facility interest rate to 6.25 percent.
Bank Indonesia Governor Perry Warjiyo said that the policy was taken because inflation is expected to remain low and under control within the target range of 2.5 percent ± 1 percent until 2026. The decision to lower interest rates was made to maintain the stability of the rupiah exchange rate which continues to move in accordance with national economic fundamentals. By considering the strengthening of the rupiah exchange rate and the decreasing uncertainty of the global financial market, this monetary policy is expected to be an effective stimulus for strengthening the Indonesian economy in a sustainable manner.
The stable rupiah exchange rate and even experiencing an appreciation of 1.13 percent until mid-May 2025 is an indication that external stability has been maintained. The rupiah has also strengthened compared to the group of developing country currencies and developed country currencies outside the US dollar. Based on these indicators, BI assesses that the room for monetary policy easing is wide open without causing major risks to national macroeconomic stability.
In addition, BI continues to strengthen its market-based monetary operations strategy (pro-market) to facilitate policy transmission. This strengthening is carried out through optimization of instruments such as Bank Indonesia Rupiah Securities (SRBI), Bank Indonesia Foreign Currency Securities (SVBI), and Bank Indonesia Foreign Currency Sukuk (SUVBI). This aims to strengthen liquidity, deepen domestic money and foreign exchange markets, and encourage the inflow of foreign capital that supports the strengthening of the national financial market.
BI Senior Deputy Governor Destry Damayanti explained that the BI Rate cut this time was carried out at the right time. She revealed that since the last BI Rate cut in January 2025, the overnight interbank money market interest rate has experienced a significant decline from 6.03 percent to 5.77 percent. The decline was also reflected in other financial instruments such as the 12-month SRBI and the 10-year government Government Securities (SBN), each of which experienced a decline in yield.
Destry added that during May 2025 there was a significant inflow of foreign capital, totaling Rp20.63 trillion, most of which came from SBN. The momentum of this capital flow also strengthened Bank Indonesia’s confidence to continue monetary easing in order to encourage the recovery of domestic demand, both household consumption and private investment.
Meanwhile, Bank Mandiri Chief Economist, Andry Asmoro, views BI’s decision to lower interest rates as very appropriate in supporting domestic consumption and investment. According to him, this step needs to be taken because external pressures are starting to ease and Indonesia’s main trading partners are experiencing an economic slowdown that is affecting national export performance. The relatively stable rupiah exchange rate in recent times is considered to provide sufficient policy space for monetary easing without threatening Indonesia’s external stability.
Andry also sees synergy between Bank Indonesia’s monetary policy and the government’s fiscal policy which remains expansive but cautious. The combination of the two is very much needed to maintain the momentum of national economic growth amidst global uncertainty and a slowdown in several industrial sectors. The BI Rate cut will increase people’s purchasing power and accelerate the recovery of the business sector through lower credit costs and looser access to funding.
On the other hand, Permata Bank Chief Economist, Josua Pardede, explained that the policy of lowering the benchmark interest rate was supported by very controlled inflation conditions. He said that as of April 2025, Indonesia’s inflation was recorded at 1.95 percent annually (year-on-year), below the middle of BI’s target range. This condition creates ample room for Bank Indonesia to adopt a more accommodative monetary policy.
The improving external conditions also strengthen the justification for the policy easing steps. Josua assessed that the trade talks between the United States and China which resulted in a mutual reduction in retaliatory tariffs, as well as the downward trend in inflation in the United States, are pushing the global market towards a more stable direction. This trend supports the possibility of a reduction in the benchmark interest rate by the US central bank (The Fed), which will reduce pressure on the currencies of developing countries, including the rupiah.
Bank Indonesia’s move to lower the benchmark interest rate to 5.50 percent reflects an adaptive and measured response to macroeconomic challenges. This decision is not only based on economic data showing the stability of inflation and exchange rates, but is also supported by increasingly conducive external conditions. This policy is expected to strengthen the resilience of the national economy, accelerate recovery after the slowdown, and maintain the competitiveness of the financial sector and business world.
The BI Rate cut means that there is a potential for a decrease in loan interest rates in the banking sector that can be used to increase consumption and investment activities. Lower credit costs can help business actors, especially MSMEs, to expand their businesses and create jobs. Bank Indonesia shows its commitment to maintaining a balance between stability and growth, by continuing to monitor economic dynamics both domestically and abroad.
*)The author is a social and community observer
