BI holds the policy rate. Bank Indonesia kept its policy rate unchanged at 4.75% after three consecutive cuts, against both our and consensus expectations of another 25bp cut (Exhibit 1). BI shifted its focus toward improving monetary policy transmission, emphasizing the need for banks to accelerate lending rate reductions to support growth. Indeed, BI opted to ease macroprudential policy by providing incentives for lending rate cuts. However, BI reiterated that there remains room for additional rate cuts ahead.
Higher likelihood of Fed Funds Rate cut. BI continued to characterize global uncertainty as elevated, citing the additional sectoral tariffs imposed by the US and its plan to introduce an additional 100% tariff on China. However, BI sees a higher likelihood of a Fed Funds Rate cut given the weakening US labor market. Nonetheless, BI now expects global growth in 2025 at 3.1%, up slightly from 3.0% previously, although still below 2024 s 3.3%. BI also hinted at a CA surplus in 3Q, following a USD3bn deficit in 2Q, driven by a higher trade surplus. BI now expects CAD to fall below its initial forecast range of 0.5 1.3% of GDP.
Still-weak domestic demand. BI reiterated its forecast that GDP growth will be slightly above the midpoint of its 4.6 5.4% range for 2025. BI expects support from higher exports and fiscal stimulus, despite still-weak domestic demand in 3Q. Loan growth edged up to 7.7% y-o-y in September from 7.6% but remained below the 8 11% target. BI noted that this has contributed to a high undisbursed loan ratio of 22.5% of total loans, mainly in the manufacturing, mining, and wholesale trade sectors.
Persistently weak monetary transmission. Following a total of 150bp in rate cuts, 1m deposit rates have declined by only 29bp YTD, while lending rates have fallen by just 15bp. Starting 1 Dec, BI introduced an additional maximum 0.5% RRR reduction incentive (from 9% headline rate), on top of the existing maximum 5%. The additional 0.5% functions through the interest rate channel, meaning the greater the reduction in banks lending rates, the higher the incentive. Banks with BI Rate elasticity between 0.3 0.6 will receive a 40bp incentive, while those above 0.6 will receive 50bp. Liquidity support from the RRR discount has reached IDR393tn (4.9% of deposits), implying RRR after discount at 4.1%.
New instruments introduced. To strengthen monetary policy transmission, BI plans to issue Floating Rate Notes (BI-FRN) and develop longer-tenor Overnight Index Swaps (OIS). The BI-FRN will have tenors ranging from 1 to 12 months, be rupiah-denominated with no underlying asset, and carry a coupon based on compounded IndONIA plus a margin, paid at maturity through fixed-rate or variable-rate tenders. The BI-FRN is expected to enhance exposure to domestic interest rate risk and encourage banks to participate in OIS transactions as hedging instruments, ultimately serving as a catalyst for developing the OIS curve in Indonesia s money market (see Eco Box).
We still expect more BI Rate cuts ahead. We maintain our forecast for the BI Rate to decline to a terminal level of 4.00% in 2026. In terms of trajectory, we now expect BI to deliver another 25bp cut in 4Q25 (vs 50bp previously) and an additional 50bp in 1Q26 (vs 25bp previously). Our forecast implies a real policy rate of 1.5% in 2026, slightly below the long-term average of 1.6%, indicating a mildly accommodative stance (Exhibit 4). In the Q&A session, Governor Perry stated that there remains room for further rate cuts as the economy continues to operate below potential. He emphasized that policy timing will be assessed monthly and that BI will focus on accelerating lending rate reductions and strengthening fiscal monetary coordination to boost loan demand. Our forecast assumes the Fed will cut its policy rate by a total of 50bp in 4Q and 50bp next year.
