Another pause by BI. Bank Indonesia kept the policy rate unchanged for the third consecutive meeting at 4.75%, in line with consensus expectations (Exhibit 1). We did see a slim chance for BI to cut following the Fed s 25bp cut last week and lower SRBI rates. BI s policy stance still puts Rupiah stability as the top priority, although it is no longer characterized as a short-term policy. BI continues to reinforce efforts to improve monetary-easing transmission and sustain growth momentum. Governor Perry informed that Vice Finance Minister Suahasil Nazara attended the meeting.
Limited transmission from the Fed cut. BI acknowledged easing global uncertainty but sees limited room for further Fed rate cuts following the latest move. BI sees limited transmission to UST yields, as they remain elevated. BI raised its 2025 global growth outlook to 3.2% from 3.1% previously and expects a slowdown to 3.0% in 2026. BI now sees the current-account deficit in a range of 0.2 1.0% of GDP in 2026 (Mansek: 1.1%), widening from 0.7% deficit to a 0.1% surplus this year (Mansek: 0.3%).
Liquidity incentive recalibration. BI maintained total liquidity incentives at a maximum of 5.5% but recalibrated the mix. BI reduced sector-based lending liquidity incentives to a maximum of 4.5% from 5.0%. To offset this, BI raised lending-rate sensitivity incentives to a maximum of 1.0% from 0.5%, a new incentive that became effective in December (see Policy Rate Update: BI Holds Policy Rate After Three Consecutive Cuts). Liquidity support from the RRR discount has decreased to IDR388tn (4.8% of deposits) from IDR405tn previously, implying an effective RRR of 4.2%.
Excess reserves remuneration. BI surprisingly introduced remuneration on excess reserves held in BI demand deposits (outside the minimum requirement) at 3.5% (or 25bp below the Deposit Facility rate of 3.75%), from zero previously. BI argued that this policy is intended to provide banks with greater flexibility in placing excess liquidity, in addition to money market and OMO. Remuneration for the required reserves remained at 1.5%.
Targeting higher M0 growth. BI targets double-digit M0 growth, which slowed to 6.5% y-o-y in Nov from 7.7% in Oct, due to lower demand deposits at BI. Unlike OMO instruments, BI demand deposits are considered part of M0. Following the IDR200tn MOF placement to SOE banks from BI s account, M0 growth surged to 13.2% in Sep from 0.3% in Aug (Exhibit 2). The MOF urged banks to channel the liquidity into loans, prohibiting placements in government bonds and BI s OMO instruments. BI recently reduced SRBI auction frequency and lowered rates after previously raising them to defend the Rupiah (Exhibit 3).
Monetary transmission remains limited. Following a cumulative 150bp in rate cuts, one-month deposit rates have declined by 67bp ytd (vs. 56bp in 10M25), while lending rates have fallen by just 24bp (vs. 20bp previously) (Exhibit 4). Loan growth picked up to 7.7% y-o-y from 7.4% in October, remaining below the 8 11% target, reflecting weak loan demand as corporates remain in wait-and-see mode and rely more on internal funding. BI still expects GDP growth of 4.7 5.5% in 2025 and a further increase to 4.9-5.7% next year.
We still expect more cuts by BI in 2026. We continue to forecast additional policy rate cuts by BI, maintaining a terminal BI Rate of 4.25% in 2026. In terms of timing, we now expect a total of 50bp in rate cuts in 2026, which would bring the real policy rate to around 1.8%. Indeed, BI again stated that there remains room for additional rate cuts ahead. The remuneration of excess reserves placed in BI demand deposits can support higher M0 growth but could be seen as contractionary, as it disincentivizes loan channeling, although BI is likely to balance this by reducing liquidity absorption via OMO.
