Indonesia’s Central Bank Cuts Interest Rate by 0.25%

The Bank Indonesia headquarters in Jakarta. Bloomberg News/Dimas Ardian

On Sept. 18, Indonesia’s Central Bank (Bank Indonesia) announced a decrease in their interest rate from 25 basis points (0.25%) to 6%, in a move that came as a surprise to most experts. They announced the cut mere hours before the Federal Reserve announced its own rate cut by 50 basis points (0.5%) to stimulate the US Economy. 

An interest rate set by the central bank of a country determines how much interest banks charge in overnight loans to each other. In practice, it determines the interest rate that most banks in any given country charge for most of their loans, which in turn affects the amount of money in a nation’s economy. 

Starting in March 2022, the US Federal Reserve began to continuously hike interest rates due to record inflation. To prevent their currencies from being significantly affected by the change in the US Dollar supply, many central banks around the world increased their interest rates in tandem – Indonesia being among them; The interest rate was further hiked due to concerns of inflation in early 2023. Right before the recent cut, Indonesia’s interest rate stood at 6.25% – almost double of what it was two years prior.

Despite having a high interest rate, which is detrimental to economic stimulation in a country, Indonesia’s economy has shown steady growth over the past year. Indonesia’s GDP has grown by over 5% in the first half of the year, and the monthly inflation rate currently sits at a low of 2.12%. However, a recent report by Bloomberg Economics suggests that domestic consumer sentiment and hiring have stalled. Thus, the current cut in rates signals a desire by the Bank Indonesia to stimulate the economy to maintain the financial stability the country has right now. 

Drone view of a nickel mine in Sulawesi, Indonesia. SP Global/Adhitya Nur

Analysts remain positive about the future of Indonesia’s economy. Expectations buoyed by the abundant natural resources present in the country; Indonesia has the world’s largest nickel reserves – a commodity that is fast growing in use due to the emergence of electric vehicles. Coupled with a young population and a growing middle class, Indonesia’s economy has many comparative advantages that may see it emerge as a global economic powerhouse in the future. 

However, Indonesia still remains beset with numerous structural challenges; Bureaucratic red tape has stifled the growth of high-tech industries in the region, preventing it from specializing unlike many of its ASEAN neighbors. Environmental and ethical concerns about its mining industry are hindering its ability to sell to Western countries. It remains to be seen whether Indonesia will overcome these structural issues or if they will continue to hinder the country's development.