On September 18, the central bank of Indonesia made a significant announcement, deciding to cut the benchmark interest rate by 25 basis points to 6%. This move also included a reduction in both deposit and lending rates, which were lowered by 25 basis points to 5.25% and 6.75%, respectivelyThis marks the first interest rate cut for the Bank of Indonesia since February 2021, with rates having been held stable at 3.5% from early 2021 until July 2022. An upward trajectory began in August 2022, leading to an extended period where the rates maintained a high level of 6.25%, slated to remain until August 2024.

The governor of Bank Indonesia, Perry Warjiyo, articulated that this strategic decision is aligned with their expectations of low inflation for 2024 and 2025. The objective is not only to stabilize the exchange rate of the Indonesian rupiah but also to stimulate economic growth across the nation

Warjiyo highlighted that the central bank will intensify its policy mix, encompassing monetary measures, macro-prudential strategies, and improvements in the payment system, to facilitate economic stability and foster sustainable growthFurthermore, he emphasized that there would be a continued focus on interest rate reductions in the future.

The central bank's decision to cut rates is based on five crucial considerationsFirst, there is a distinct understanding that the Federal Reserve, the central bank of the United States, might continue on a path of rate reductionsThis prediction from Bank Indonesia suggests a potential for ongoing cuts within this yearSecond, the rupiah has shown stability after substantial adjustments earlier in the year, evidenced by a 0.87% rise thus farOn September 18, the exchange rate stood at a favorable level of 15,335 rupiah to the dollarThird, Indonesia is currently experiencing low inflation, and the central bank is optimistic that it will remain under control

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Their targeted inflation rate for 2024 and 2025 aims to comfortably reside within the range of 1.5% to 3.5%. Fourth, there is an urgent need to support economic growth, particularly in sectors like retail and among small and medium enterprisesLastly, the bank aims to further incentivize the allocation of credit from banks to support broader fiscal policies.

In the context of driving economic progress, the Indonesian economy must address challenges from both demand and supply sidesThe bank maintains its growth forecast at 4.7% to 5.5%, with a median of 5.1%, closely aligning with the government's target of 5.2%. With an effective combination of interest rate cuts and government fiscal stimulus, growth is anticipated to exceed the midpointNotably, during the first half of this year, Indonesia witnessed a growth rate of 5.08%. Continued increases in investment, particularly in the new capital city project and various national strategic initiatives, reflect promising economic prospects

Also, persistent growth in household consumption coupled with steady exports of non-oil and gas products is expected to further bolster growth.

According to economists from PREMIER SEKURITAS, the reduction in interest rates is likely to yield positive outcomes for economic activity and encourage a rebound in household purchasing powerThey predict that Bank Indonesia will implement further rate cuts, totaling a 50 basis points reduction by the end of the yearRyan from the Indonesian Banking Development Institute characterized this interest rate cut as a bold action by Bank Indonesia amid signs of economic slowdownBy reducing rates on loans from both banking and non-banking sectors, the intention is to stimulate credit demand, which could result in an economic recovery during this transitional period of government.

Recent months have shown indications of a deceleration in Indonesia's economic growth, highlighted by persistent monthly deflation and a manufacturing Purchasing Managers' Index (PMI) falling below the neutral mark

Data from the Indonesian Central Statistics Agency revealed that Indonesia has faced four consecutive months of monthly deflation as of August, an occurrence unseen since the Asian financial crisis in 1998, which lasted for seven monthsThe manufacturing sector has also reported two consecutive months of contraction, with the PMI dropping to 49.3 in July, marking the end of a robust 34-month expansion phaseIn August, the manufacturing PMI fell further to 48.9, indicating continued contraction.

The head of the Indonesian Center for Economic and Law Studies, Bima, raised concerns about the sustainability of economic growth, cautioning that if this trend persists, achieving over 5% growth for Indonesia this year could prove challengingHe indicated that the four-month stretch of deflation signals a soft landing for the economyHowever, in the context of Indonesia—a developing country with 47.8 million individuals at a moderate consumption level—this signals troubling economic indicators