Indonesia central bank keeps policy interest rate at 5.75% after market rout

SINGAPORE (ICIS)–Indonesia’s central bank kept its policy rate unchanged at 5.75% on Wednesday, a day after local stocks closed nearly 4% lower, on concerns over the country’s economic growth prospects and government finances.

• Jakarta composite index shed 3.8% on 18 March
• Rupiah remains under control, central bank says
• Economy projected to grow by 4.7-5.5% in 2025

Bank Indonesia (BI) kept the benchmark seven-day reverse repurchase rate steady at 5.75% and left its overnight deposit facility and lending facility rates unchanged at 5.00% and 6.50%, respectively.

The rupiah (Rp), which initially fell in early trade, stabilized after BI’s announcement at Rp16,515 per US dollar, near its lowest level in five years.

The BI’s move to keep rates stable was “consistent with efforts to keep the 2025 and 2026 inflation forecasts” within the target of 2.5% plus or minus one percentage point; “maintain rupiah exchange rate stability in line with fundamentals amidst persistent high global uncertainty, and contribute to economic growth”, the central bank said in a statement.

BI also said that the rupiah exchange rate remains under control, supported by stabilization policies.

The rupiah strengthened by 0.94% against the US dollar in March after weakening by 1.69% in February 2025, “influenced by reduced foreign capital inflows into regional stocks, including Indonesia, in line with global uncertainty”, BI said.

“Bank Indonesia is looking for opportunities to lower rates, but a rate cut this month may come too soon following the policy easing in January. We look for the next policy rate cut in Q2,” said Lloyd Chan, senior currency analyst at Japan-based MUFG Global Markets Research Asi, in a note.

In January, the central bank issued a surprise rate interest rate cut to support economic growth amid expectations of continued low inflation in 2025 and 2026. The move had sent the rupiah tumbling to a six-month low against the US dollar.

BI’s decision comes after its benchmark Jakarta Composite Index (JCI) had slumped by 5%, triggering a temporary trading halt, and fell by as much as 7% at one point upon resuming trade, partly fueled by speculations that finance minister Sri Mulyani Indrawati is resigning.

Sri Mulyani late on 18 March dispelled the resignation rumors, according to media reports, saying she will stay on as the finance chief, emphasizing that Indonesia’s fiscal health remains sound and the budget deficit for 2025 will stay at 2.5% of GDP.

A budget deficit is a shortfall that occurs when government expenditures exceed revenues.

The JCI was volatile in early Wednesday trade, initially tumbling by more than 1%, before rebounding to trade 1.42% higher at 6,311.66 as of 09:00 GMT.

Indonesia’s sole cracker operator Chandra Asri’s shares were up by 13.4% on Wednesday.

Indonesia is a net importer of several petrochemicals, including polyethylene (PE) and polypropylene (PP); while it is a major exporter of crude palm oil (CPO) and its downstream oleochemicals.

ELEVATED FISCAL RISKS
Japan’s Nomura Global Markets Research in a note said that it continues to see elevated fiscal risks and forecast a widening of the fiscal deficit to 2.9% of GDP in 2025, from 2.3% last year and versus the government’s target of 2.5%.

“Recent changes pushed by President [Subianto] Prabowo, including an expansion of his priority programs, will cost an additional 0.9% of GDP, by our estimate,” Nomura said.

The Indonesian government has not introduced any new revenue-generating measures, instead relying on enhanced tax administration efforts, which are expected to have a limited impact, it said.

“President Prabowo’s instruction to perform budget cuts worth 1.3% of GDP could provide some offset, but this will likely be very difficult to achieve, given public pushback, in our view, and would weigh on domestic demand,” Nomura said.

“Local sentiment, in our view, has dropped significantly, as these domestic policy concerns are exacerbating external risks.”

2025 GROWTH
Indonesia’s economic growth is projected to remain strong in the range of 4.7-5.5% in 2025, despite persistent global uncertainties, BI said.

Southeast Asia’s largest economy expanded by 5.03% in 2024, slowing from the 5.05% growth in 2023.

Prabowo’s government aims to increase the real GDP growth rate to 8% within two to three years, from the 5% average over the past 10 years (excluding the Covid pandemic years of 2020-2021).

This optimistic outlook is supported by robust household consumption, bolstered by consumer confidence, government spending and seasonal demand, BI said.

Increased private investment, driven by positive producer sentiment and expanding order volumes, is expected to contribute significantly to this growth, it said.

While external factors present challenges, particularly in mining and processing, growth in non-oil and gas exports and the agricultural sector are anticipated to offset these effects.

Focus article by Nurluqman Suratman