- Bank Indonesia cut rates by 25bp to 5.25%. Inflation is on a conducive path.
- US President Trump announced a trade deal with Indonesia, lowering the effective tariff rate.
- Pulse of the incoming activity indicators suggest momentum is soft, keeping growth below 5%.
- Current account dynamics are favourable, flows under watch.
- Implications for markets: Short end bonds are likely to benefit from dovish guidance.
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Bank Indonesia cuts
Decision and economic assessment
Bank Indonesia cut the benchmark rate by 25bp to 5.25% on Wednesday, taking a growth-supportive stance, vs our expectations for a temporary pause, as external caution was negated by fresh news over the trade deal (see our note).
Indonesian policymakers have been opportunistic this year, prudently tapping periods of market stability to lower rates, with the latest move also coming against the backdrop of the successful completion of a trade deal with the US. BI also expressed confidence on a pickup in growth in second half of the year, widening the 2025 GDP projection range to 4.6-5.4% growth. Loan growth estimates are ambitious at 8-11% for 2025, which might need to be revised considering the Jan-Jun25 run-rate.
Outlook
The central bank is likely to support the currency through regular intervention presence, while staying bid on domestic bonds to stabilise yields, if required. On policy, we had expected the BI to stay dovish in light of the loss in growth momentum in first half of the year. Besides lowering rates, we expect more verbal suasion on banks to lower borrowing costs to provide relief. We have another 25bp cut in our baseline view, taking the rate to 5.0%.
Indonesia-US trade deal
US President Trump announced that a trade deal had been reached with Indonesia, which will lower the tariff rate to 19% from 32% levied earlier. More than 20 countries have received tariff notification letters from the US President, but according to the White House, Indonesia is the fourth country to conclude a “deal.” Indonesia has reportedly committed to purchase $15bn worth energy imports and $4.5bn worth agricultural goods from the US, besides stepping up orders for aviation jets. US might tap into the country’s natural resource supplies, including copper, with the government seeking better access to the onshore industries/ markets. Details were scant at the time of writing. US had flagged Indonesia’s non-trade barriers, amongst others, as key sticking points during negotiations.
2H outlook: Pulse of incoming indicators
As we detailed in Indonesia: Tracking the growth pulse, second half of the year is likely to see higher public spending, positive net exports, easing monetary conditions and welfare measures surface as being supportive of growth. Key offset factors are modest income growth, and overhang of global uncertainty. Assuming sub-5% growth in 2H25, we expect growth to average 4.8% yoy this year, softest since the pandemic years. Indonesia’s growth has averaged 5% in the last decade, apart from the Covid-driven slowdown.
Fiscal push, current account tailwinds
In Jan-May25, domestic revenues are down 11% yoy (see chart), accompanied by a drop in the growth in disbursements, helping to contain YTD fiscal slippage. Non-tax receipts added to this underperformance, down ~-25% yoy. At the same time, cumulative allocation towards the free meals program stands trimmed to IDR 350trn vs IDR 400trn floated at the start of the year, partly due to operational and administrative issues. Slower spending towards the social programs also led to only 7.1% of the budgeted IDR 71trn being disbursed towards the flagship nutritious meal program by May25.
We expect current account dynamics to stay favourable this year. 2024 current account registered a narrow deficit of -0.6% of GDP, benefiting from a significant goods trade surplus that helped to offset the shortfall in services, and primary income (which includes investment income). 1Q25 current account deficit was contained at -0.1% of GDP, as the goods balance rose to $13bn vs $11bn in the Dec24 quarter, while other segments were close to last year’s averages (see chart).
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