The Indonesian Central Bank (BI) announced a 25-basis point cut to its benchmark interest rate, bringing the BI 7-Day Reverse Repo Rate down to 5.50 percent, its first reduction in four months as the central bank seeks to maintain inflation within target, while boosting economic growth amid increasing global uncertainty.

The decision, reached during the central bank’s Board of Governors Meeting (RDG) on May 21, 2025, follows a period of monetary tightening that kept the rate at 5.75 percent since January 2025.

“This policy move is consistent with our inflation outlook for 2025 and 2026, which remains within the target range of 2.5 percent ±1 percent, and supports efforts to maintain rupiah exchange rate stability while encouraging domestic economic growth,” BI Governor Perry Warjiyo told a press conference, on Wednesday, May 21, 2025.

Indonesia’s GDP grew by 4.87 percent year-on-year in the first quarter (Q1) of 2025, its slowest pace in three years and below the 5.02 percent posted in Q4-2024. Reflecting on recent developments, BI revised its 2025 growth projection slightly down to 4.6–5.4 percent from a previous range of 4.7–5.5 percent.

“With rising global trade tensions and the impact of reciprocal tariffs from the U.S., it is crucial that we continue to strengthen domestic demand and seize opportunities for export growth,” Perry emphasized.

The rate cut comes at a time when the rupiah is showing signs of resilience. From late April to May 20, the currency appreciated by 1.13 percent point-to-point against the U.S. dollar, supported by improved market sentiment and easing global volatility.

Perry noted that the rupiah has outperformed several emerging market currencies and remains in line with Indonesia’s economic fundamentals. “This provides us with sufficient room to recalibrate our policy stance toward supporting growth,” he said.

Inflation, external balance

April inflation was recorded at 1.95 percent year-on-year, comfortably within BI’s target range. Core inflation remained steady at 2.5 percent, while volatile food and administered prices rose 0.64 percent and 1.25 percent respectively.

Meanwhile, Indonesia’s external sector continues to show resilience. The current account deficit (CAD) is expected to remain low at 0.5–1.3 percent of GDP, supported by a trade surplus, particularly in non-oil and gas exports. The country's foreign exchange reserves stood at US$152.5 billion at the end of April, equivalent to 6.4 months of imports.

Portfolio investment inflows rebounded in May, especially into government bonds and equities, after a brief period of net outflows in April. BI anticipates continued capital inflows in the coming months, enhancing the country’s external buffers.

Perry hinted that further rate cuts could be on the table, depending on macroeconomic developments. “Our macroprudential, monetary, and payment system policies will continue to be aligned to support sustainable economic growth,” he said.

Expectations

The rate cut was largely in line with market expectations. A Reuters poll conducted from May 14–19, 2025 showed 20 out of 32 economists forecasting a 25-basis point reduction. The remaining 12 expected the rate to be held steady.

Senior economist at DBS Bank, Radhika Rao, noted that the May cut likely reflects BI’s intention to capitalize on the rupiah’s recent gains and improving risk appetite, driven in part by easing tensions between the U.S. and China.

Looking ahead, 55 percent of economists surveyed by Reuters predict that the benchmark rate could fall to 5.25 percent by the end of Q3, though longer-term expectations remain divided.

BI’s move signals a cautious shift in monetary policy as it navigates slowing growth and volatile global dynamics, while maintaining its commitment to price and financial stability.