Bank Indonesia (BI) recently lowered its benchmark interest rate (BI Rate) by 25 basis points to 5.50% on May 21, 2025, as part of efforts to stimulate a slowing economy. This marks the third rate cut since September 2024.
Positive Outlook of the BI Rate Cut
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Boosting Economic Growth
The rate cut aims to stimulate domestic consumption and investment, expected to accelerate economic recovery. With lower borrowing costs, both businesses and consumers are more likely to invest and spend. -
Controlled Inflation Stability
Low and stable inflation has given BI the room to ease monetary policy without triggering significant price increases. This supports the central bank’s goal of maintaining price stability while fostering growth. -
Increased Bank Liquidity
BI also reduced the secondary reserve requirement from 5% to 4%, freeing around IDR 78.45 trillion for banks to support credit growth. In addition, the foreign borrowing limit for local banks was raised from 30% to 35% of capital, offering more liquidity flexibility.
Challenges to Consider
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Risks to Rupiah Exchange Rate
Lower interest rates can narrow the gap with the U.S. Federal Reserve’s benchmark rate, potentially triggering capital outflows and pressuring the rupiah. BI must closely monitor this and be ready to intervene to maintain currency stability. -
Effectiveness of Monetary Policy Transmission
Even though the benchmark rate has been cut, banks may not immediately lower their lending rates. To protect their profit margins, banks might maintain high interest rates, which could hinder credit growth in the real sector. -
Dependence on Monetary Stimulus Alone
Without support from fiscal policies and structural reforms, monetary easing alone may not be enough to sustain long-term economic growth. Sectors such as MSMEs (Micro, Small, and Medium Enterprises) still face financing access issues despite lower rates.
The BI Rate cut reflects Bank Indonesia’s effort to balance economic growth and macroeconomic stability. While the outlook is positive, the success of this policy relies heavily on coordination with fiscal measures and how well the financial sector responds in channeling credit to productive sectors.
إِنَّمَا الْأَعْمَالُ بِالنِّيَّاتِ، وَإِنَّمَا لِكُلِّ امْرِئٍ مَا نَوَى
Artinya: “Sesungguhnya segala amal tergantung niatnya, dan setiap orang akan mendapatkan sesuai dengan apa yang diniatkan.”
[HR. Bukhari dan Muslim]
