Bank Indonesia (BI) has lowered its benchmark interest rate to 5% in August 2025, marking its fifth rate cut since late 2024. The move reflects growing confidence in Indonesia’s inflation trajectory and macroeconomic stability. As global uncertainties persist, BI’s policy mix aims to balance growth stimulation with currency resilience and financial system integrity.
Key Facts & Background:
- On August 19–20, 2025, BI reduced its benchmark interest rate (BI Rate) by 25 basis points (bps) to 5%.
- Deposit Facility and Lending Facility rates were also cut by 25 bps, to 4.25% and 5.75% respectively.
- This marks the fourth rate cut in 2025 and the fifth since late 2024, totaling a 125 bps reduction from the peak of 6.25%.
- Governor Perry Warjiyo stated the decision aligns with BI’s assessment of low and stable inflation forecasts for 2025–2026, within the target range of 2.5% ±1%.
- The rate cut also supports rupiah stability and aims to stimulate economic growth in line with Indonesia’s productive capacity.
- BI is complementing monetary easing with accommodative macroprudential policies to boost credit and banking liquidity.
- Payment system reforms—including digital expansion and infrastructure resilience—are also part of BI’s broader growth strategy.
Strategic Implications:
1. Signaling Confidence in Inflation Management
BI’s rate cut underscores its confidence in maintaining inflation within target bounds despite external pressures. With inflation projected to remain subdued through 2026, the central bank has room to ease policy without risking price instability. This reinforces BI’s credibility in inflation targeting and enhances its ability to act preemptively in support of growth.
2. Supporting Domestic Demand Amid Global Headwinds
The rate reduction is a strategic lever to stimulate domestic consumption and investment, especially as global demand remains uneven. Lower borrowing costs can encourage credit expansion, particularly in sectors like manufacturing, retail, and housing. This is crucial for Indonesia’s post-pandemic recovery and its ambition to sustain 5–6% GDP growth over the medium term.
3. Enhancing Monetary Transmission and Financial Inclusion
By easing rates and reinforcing macroprudential tools, BI aims to improve the transmission of monetary policy to real-sector lending. This could benefit small and medium enterprises (SMEs), which often face high financing barriers. Coupled with digital payment expansion, the policy mix supports broader financial inclusion and economic participation.
4. Maintaining Currency Stability and Investor Confidence
Despite easing, BI remains committed to rupiah stability—a key concern for foreign investors and import-dependent industries. The central bank’s policy mix, including capital flow management and FX interventions, helps mitigate volatility. This balance between growth and stability is critical for sustaining investor confidence and avoiding capital flight.
5. Long-Term Structural Reform Through Payment Systems
BI’s emphasis on payment system modernization reflects a forward-looking approach to economic infrastructure. Expanding digital payments, strengthening industrial integration, and enhancing system resilience are foundational to Indonesia’s digital economy ambitions. These reforms can reduce transaction costs, improve transparency, and support e-commerce and fintech growth.
6. Policy Continuity and Institutional Credibility
The August 2025 rate cut aligns with BI’s consistent and transparent policy framework. Regular assessments, clear communication, and coordinated policy instruments reinforce institutional credibility. As Indonesia navigates global uncertainty and domestic transformation, BI’s steady hand offers reassurance to markets, businesses, and policymakers alike.