Central Bank leaves rates unchanged in December

Interest rates end 2024 unchanged: At its meeting on 17–18 December, Bank Indonesia (BI) decided to maintain the BI-Rate at 6.00% for the third consecutive month, while also keeping the Deposit Facility rate and Lending Facility rate at 5.25% and 6.75%, respectively. Market analysts had largely priced in the decision.

BI stands pat to shore up the rupiah: BI’s decision to hold interest rates steady was primarily driven by the need to safeguard the rupiah's stability and halt capital outflows amidst heightened global economic uncertainty, particularly due to monetary, fiscal and trade policy changes in the United States and heightened geopolitical tensions. BI also aimed to maintain inflation within the 1.5–3.5% target corridor in 2025. The monetary authority was steadfast in the face of growing pressure to cut rates amid weaker-than-expected GDP growth in Q3. The Bank will reconvene on 14–15 January.

Cautious rate cuts ahead: Concerning future policy moves, BI stated that it “will remain vigilant of Rupiah exchange rate movements and the inflation outlook as well as emerging dynamic economic conditions when considering further room for monetary easing”. Our Consensus is for BI to resume its monetary policy easing cycle in Q1 and continue to gradually cut rates until the end of 2025. A weaker rupiah and higher-than-expected inflation pose upside risks to the policy rate, while the U.S. Fed’s policy stance is a bi-directional risk.

Panelist insight: United Overseas Bank analyst Enrico Tanuwidjaja commented: “Given the likely changes and associated uncertainty on the Fed’s rate path in 2025 coupled with a likely prolonged period of USD strength, we revise our view for BI to be on an extended pause in 1H25 before resuming its rate cutting cycle with possibly 2x25bps cuts in each quarter in 2H25. We now only expect a cumulative 50bps rate cut for the BI rate to reach 5.50% by the end of next year.” Nomura analysts Euben Paracuelles and Nabila Amani commented on risks to the outlook: “We continue to emphasize that the timing of the cut by BI will be highly contingent on the external environment, as evident in BI’s decision today. BI’s shallower and more backloaded cutting cycle also poses further downside risks to our 2025 growth forecast, which we recently lowered slightly to 4.9% from 5.0%, partly for the same reason, i.e., BI has more limited scope to ease monetary policy and support domestic demand.”

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