• In its November 2024 meeting, Bank Indonesia (BI) prudently opted to maintain its benchmark interest rate at 6%, a move largely anticipated by the market given recent IDR volatility against the USD coupled with rising geopolitical tension. While there appeared to be a narrow window for a rate cut, given the ample FX reserves, the decision underscores BI's focus on ensuring the stability the local currency, particularly on the back of ongoing global economic uncertainties stemming from developments in the United States and China.
• ⁠The IDR’s 0.84% MoM depreciation resulted from global surge in demand for U.S. assets following Trump’s victory that caused USD strengthening. Nevertheless, Indonesia's inflation dynamics remain favourable despite IDR weakness with annual inflation rate having decelerated to 1.71% in October 2024, down from 1.84% in September, marking the lowest level since October 2021. This signals effective inflation management, helped by the current elevated interest rate level. However, BI now has some room to navigate its benchmark rate without resorting to contractionary policy that could stifle future growth.
• ⁠BI also held the overnight deposit at 5.25% and lending facility rates at 6.75%, reinforcing its commitment to stable monetary environment. These measures are particularly critical as the central bank balances its monetary policy with external challenges, including volatile capital flows and shifting investor sentiment towards developed markets.
• This policy consistency highlights BI's preference in maintaining Indonesia’s contained inflation outlook and guard against IDR unfavourable fluctuations in an effort to raise the country’s economic fundamentals. However, the persistent strength of the USD and global risk-off sentiment present ongoing challenges for the IDR. Moving forward, BI is likely to remain vigilant, employing macro-prudential tools and forex market interventions to stabilize the currency and sustain investors’ confidence.
• Looking ahead, given USD 151.2bn in recorded FX reserves and the 54th consecutive trade balance surplus, a potential rate cut remains on the table for BI in the next meeting, particularly if the Fed will lower its policy rate in December. However, both BI and the Fed may maintain their status quo throughout the year assuming more heated geopolitical and geoeconomic risks. That said, further rate cuts require careful assessments as we head into 2025, considering Indonesia's twin deficits are likely to widen due to increased budget spending and decreased exports, pressured by potential economic hard landings in both the US & China.