Bank Indonesia cuts rates as economic strains emerge amid ongoing tariff tensions

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[JAKARTA] Indonesia’s central bank has lowered interest rates for the second time this year, betting on easing US-China trade tensions and a stable rupiah to help spur domestic economic growth.

Bank Indonesia cut its benchmark interest rate by 25 basis points to 5.5 per cent on Wednesday (May 21), in line with the expectations of 22 out of 35 economists surveyed by Bloomberg.

While the move was broadly anticipated by the market, some analysts argue that there is little justification for BI to ease monetary policy at this point, as the rupiah remains largely unchanged at around 16,400 per US dollar – the same level it held four months ago.

Satria Sambijantoro, head of equity research at Bahana Sekuritas, noted that the central bank should be cautious. From a terms-of-trade perspective, he said, the rupiah has effectively weakened, as it has failed to appreciate despite a broadly softer US dollar – a signal that underlying external pressures may still be at play.

“BI is apparently under pressure to boost growth, and the central bank is now cornered by the markets demanding lower rates, as shown in the ferocious rally of rate-sensitive assets from corporate bonds to property stocks,” he wrote in a note.

Teuku Riefky, an economist at the University of Indonesia, said that while recent developments suggest a moderation in US-China trade tensions, the scope and timing of future tariffs remain difficult to predict.

“Stability is still uncertain, as the evolving nature of President Trump’s tariff policies continues to cast a shadow over the global trade outlook,” he said.

At a press briefing, Bank Indonesia governor Perry Warjiyo stressed the need for Indonesia to strengthen its policy response amid global uncertainties, particularly those stemming from ongoing US import tariff negotiations. He urged banks to lower lending rates to help spur loan growth.

“Interest rates need to be lowered to support loan expansion, which is vital for driving stronger economic growth,” he said.

“We will continue to monitor opportunities to support the economy in line with evolving global and domestic dynamics,” Warjiyo added, reaffirming the central bank’s commitment to keeping inflation within target and maintaining rupiah stability in line with economic fundamentals.

BI’s decision to cut interest rates came after Indonesia posted 4.87 per cent economic growth in the first quarter of this year, slightly down from 5.02 per cent in the fourth quarter of last year, as the impact of government budget cuts weighed on early gains from front-loaded net exports.

The central bank lowered its forecast for the country’s economic growth to a range of 4.6 to 5.4 per cent for the full year, with an inflation target set between 1.5 and 3.5 per cent.

President Prabowo Subianto has pledged to drive South-east Asia’s largest economy towards 8 per cent GDP growth during his tenure.

Radhika Rao, senior economist at DBS, said that with inflation still within the central bank’s target range, BI has room to use its monetary tools to support growth. Indonesia recorded mild inflation of 1.17 per cent in April, well below the central bank’s target.

The rupiah has rebounded by up to 1.13 per cent against the greenback since early May, supported by a temporary agreement to delay US tariffs on its trading partners, along with BI’s active interventions in the foreign exchange market.

The country has notched five straight months of net foreign buying in its bond markets, racking up US$2 billion in inflows so far this year.

Warjiyo said BI will continue to strengthen efforts to stabilise the rupiah through foreign exchange intervention, including in the offshore market.

Bank Indonesia has joined its regional peers in loosening monetary policy, aiming to bolster their economies amid the ongoing US-China trade tensions.

Thailand, Singapore, and the Philippines took steps to ease rates back in April, while Malaysia held firm this month, reflecting a mix of cautious optimism and strategic patience across South-east Asia as they navigate the stormy global trade waters.