Bank Indonesia held its benchmark at 5.75%, choosing currency defence and targeted incentives over broader monetary easing.
Bank Indonesia kept its benchmark interest rate at 5.75% in September, resisting pressure to support growth with cheaper money as renewed global volatility threatened the rupiah.
The central bank’s September 22–23 Board of Governors meeting also maintained the overnight Deposit Facility rate at 4.75% and the Lending Facility rate at 6.50%. Together, these rates form the corridor through which Bank Indonesia, or BI, guides short-term borrowing costs.
The decision was expected. Twenty-nine of 32 economists surveyed by Reuters had forecast no change. It was also the first policy meeting since Destry Damayanti became BI’s permanent governor—the first woman to hold the position—following several months of investor concern over fiscal policy and central-bank independence.
The real constraint is the currency.
BI raised rates by a cumulative 100 basis points in May and June after the rupiah fell to record lows. By September 22, it stood at Rp17,855 per US dollar, 0.78% weaker than at the end of August. Higher interest rates can make rupiah assets more attractive to foreign investors, but further tightening would also increase financing costs across an economy that the government wants to accelerate.
Indonesia’s external buffers remain adequate, though hardly comfortable. Foreign-exchange reserves reached $146.5 billion at the end of August, covering 5.4 months of imports. Yet the country recorded only $400 million in net portfolio inflows during the third quarter through September 21, while July’s trade surplus was just $120 million.
Oil compounds the problem. Middle East tensions briefly pushed crude prices to $132 a barrel before they retreated below $100 on September 22. Indonesia is a net oil importer, so expensive crude and a weak rupiah raise the local cost of fuel imports, widen subsidy requirements and increase operating expenses for transport, manufacturing and logistics companies.
Inflation offers BI some breathing room. Consumer prices rose 3.19% year on year in August, remaining within the official target of 2.5% plus or minus one percentage point. Core inflation was lower at 2.92%. Food was less benign: volatile-food inflation reached 4.06%, driven by chicken, chillies and rice, with El Niño posing an additional supply risk.
Rather than raise rates again, BI is relying more heavily on targeted instruments. It expanded discounts on foreign-exchange hedging costs for portfolio investment, bank foreign borrowing and foreign direct investment. It is also promoting transactions in partner-country currencies to reduce dependence on the US dollar.
Domestically, the central bank is using its Macroprudential Liquidity Incentive Policy, or KLM, to encourage banks to finance priority sectors. Liquidity incentives had reached Rp461.2 trillion by early September. This policy mix is deliberate: keep the headline rate high enough to defend the rupiah, then direct liquidity toward lending rather than easing monetary conditions for everyone.
Credit data suggest the approach is working, although unevenly. Bank lending increased 13.65% in August, with investment loans surging 25.11%. Working-capital credit grew 11.45%, but consumer lending rose only 5.07%. Corporate projects are drawing funding much faster than households.
For companies, the hold means financing will not become cheaper soon. Importers and businesses with unhedged dollar liabilities remain exposed; exporters may benefit from currency weakness. Banks retain healthy lending margins, but must watch repayment quality if elevated rates persist.
BI has rejected a blunt rate increase for now. A cut remains even less likely unless the rupiah strengthens, foreign inflows improve and oil risks recede. If those conditions worsen, the next move is more likely to be another increase than an early easing.