BI Cuts Rates to Cushion Growth Slowdown as Inflation Stays Benign
Bank Indonesia cut its benchmark rate by 25bps to 5.50% in May, citing subdued inflation and stabilising currency conditions. With Q1 growth slowing to 4.87%, the central bank has shifted focus to supporting domestic momentum, signalling potential for further easing in the second half of 2025.
Bank Indonesia (BI) reduced its benchmark 7-day reverse repo rate by 25 basis points to 5.50% at its Monetary Policy Committee meeting on May 20–21, citing the need to support economic growth amid low inflation and a stabilising rupiah. The move, in line with our expectations, marks the second cut in 2025 suggests a shift toward a more accommodative policy stance.
The central bank’s decision reflects growing concern about weakening domestic momentum, particularly after Q1 GDP growth slowed to 4.87% yr/yr, the lowest since Q3 2021. In response, BI lowered its full-year growth forecast to a range of 4.6%–5.4%, down from 4.7%–5.5%, while maintaining that activity would rebound in Q2, led by stronger government spending. On the inflation front, consumer prices rose 1.95% yr/yr in April, up from 1.03% in March but still below the midpoint of BI’s 2.5% ±1% target band. The acceleration was largely due to the expiration of temporary electricity subsidies. Core inflation remains contained, giving BI more room to ease policy without risking price instability.
The rupiah strengthened 1.13% against the US dollar in May (as of May 20), buoyed by a weakening DXY and positive sentiment around Indonesia’s proactive approach to trade negotiations with the US. With external conditions stabilising, further easing may be possible in Q3, provided the rupiah remains resilient.
Overall, BI’s latest move signals a pivot towards supporting growth, with inflation and currency concerns temporarily subdued. Future rate cuts remain on the table as the central bank balances domestic economic support with external macro stability.