• Inline with our expectation, Bank of Indonesia (BI) decided to maintain its benchmark interest rate at 5.75% during its February 2025 meeting. This is despite inflation having eased significantly to 0.76% in January 2025—down from 1.57% in December 2024 and reaching its lowest level since March 2000, underscoring BI's objective of ensuring IDR stability amid persistent global uncertainties.
• That said, BI’s proactive intervention in the foreign exchange market has been instrumental in curbing excessive volatility and ensuring orderly market conditions. Hence, the IDR has demonstrated relative stability in the face of global market volatility. As of mid-February 2025, the currency has depreciated only 1.06% year-to-date against the US dollar, a modest movement considering the broader sell-off in emerging market currencies. Bi's commitment to stabilizing the local currency aligns with its broader strategy of reinforcing investor confidence, particularly as geopolitical risks and the US Federal Reserve’s policy trajectory remain key sources of uncertainties.
• ⁠In line with its decision on the benchmark rate, BI also kept the overnight deposit facility rate at 5% and the lending facility rate at 6.5%. This steady policy framework signals BI’s cautious approach in balancing growth and stability. While global headwinds persist—ranging from tighter financial conditions in advanced economies to ongoing geopolitical uncertainties—Indonesia’s macroeconomic fundamentals remain solid. The country's external buffers, including a resilient current account position and adequate foreign exchange reserves, provide an added layer of stability.
• Looking ahead, BI is likely to take a cautious and measured approach, closely monitoring inflation trends and global financial conditions. With inflation well within its target range, any potential adjustments to interest rates will largely depend on external factors, particularly shifts in global interest rates and capital flows. Given the likelihood that the Federal Reserve will maintain its current stance and refrain from rate cuts this year—partly due to inflationary pressures stemming from Trump’s policies, including intensified trade tensions with China—global financial conditions may remain tight.
• As a result, the IDR could face further depreciation, particularly as declining commodity prices weigh on Indonesia’s export revenues amid broader global economic slowdown. At the same time, weaker purchasing power may lead to lower tax revenues, exacerbating the country’s twin-deficit concerns. These factors could apply additional pressure on BI to sustain its hawkish stance for an extended period.