Anna 
Indonesia’s central bank, Bank Indonesia (BI), is considering lowering interest rates to boost economic growth but is awaiting a strengthening of the rupiah against the dollar, according to Governor Perry Warjiyo. He highlighted the importance of avoiding a rush amid global disequilibrium, as premature actions could lead to a weaker rupiah and uncontrolled inflation. BI had raised its key policy rate by 250 basis points from August 2022 to October 2023 to ensure rupiah stability and control inflation.
Warjiyo suggested that Indonesia has room to ease monetary policy, likely in the second half of the year, as global uncertainties ease, and the Federal Reserve is expected to trim U.S. interest rates. The recent inflation rate in January was 2.57%, close to the midpoint of BI’s target range for the year.
The governor acknowledged the recent volatility in the rupiah due to domestic political developments and changing global sentiment for risky assets linked to expectations regarding the Federal Reserve’s actions. He emphasized that monetary easing could support economic growth during the current growth cycle, expecting the cycle to peak in 2026. The extent and duration of BI’s easing cycle will depend on the pace of Indonesia’s economic growth and the anticipated government transition.
BI expects the Indonesian economy to grow between 4.7% and 5.5% in 2024, compared to the 4.5%-5.3% outlook for the previous year. In response to potential rate cuts, Warjiyo indicated that the current liquidity condition is already loose, suggesting a preference for maintaining the reserve requirement ratio (RRR) rather than trimming it. The central bank has provided certain banks with RRR rates of 5%, lower than the industry rules of 9%, as an incentive to support sectors crucial for economic growth. These incentives have added 165 trillion rupiah ($10.5 billion) to banks’ liquidity by the end of 2023.
