Bank Indonesia (BI) is expected to maintain its benchmark interest rate at 5.75% on Wednesday to prevent further depreciation of the rupiah amid rising global trade tensions, according to a Reuters poll. However, the central bank is projected to begin rate cuts next quarter to support economic growth.
Southeast Asia’s largest economy expanded just over 5% in 2024, mirroring the previous year’s pace but marking the slowest growth in three years. This falls significantly short of President Prabowo Subianto’s ambitious 8% target.
Rupiah Stability vs. Growth
While BI Governor Perry Warjiyo acknowledged the need for stimulus last month, the central bank remains cautious as the rupiah has weakened by 2% this year despite repeated forex interventions.
In a March 10-17 survey of 31 economists, 19 expected the central bank to keep rates unchanged, while 12 predicted a 25-basis-point cut. Additionally, the overnight deposit and lending facility rates are expected to remain steady at 5.00% and 6.50%, respectively.
“Similar to the February meeting, conditions for a cut… are not favorable. There has been renewed weakness in the rupiah,” said Sanjay Mathur, Chief Economist for Southeast Asia and India at ANZ. “As such, the rate-cutting cycle remains intact, but the timing of each cut will depend on FX stability.”
Global Trade Tensions and Trump’s Tariff Risks
Median forecasts predict a 25-basis-point cut in the next quarter, but there is no clear consensus among economists, given uncertainties surrounding President Donald Trump’s trade policies.
The risk of rising U.S. inflation due to Trump’s erratic tariffs is expected to keep the Federal Reserve from cutting rates, forcing BI to prioritize currency stability amid capital outflow concerns.
“Global uncertainty, particularly concerning the inward-looking and protectionist policies of the U.S., will persist and may even intensify,” said Josua Pardede, Chief Economist at Permata Bank.
“In financial markets, the repercussions of trade war risks have already been felt, as many investors have adopted a risk-off approach, leading to capital outflows. This will inevitably impact the stability of the rupiah exchange rate,” Pardede added.
Outlook: Rate Cuts Likely, But Timing Uncertain
With external risks mounting and growth slowing, BI is expected to shift toward rate cuts later in the year. However, the timing will depend on market stability and the trajectory of U.S. trade policies.