This is the reason why BI is confident in cutting the BI rate
The Bank Indonesia (BI) Board of Governors' Meeting (RDG) on September 17-18, 2024 decided to lower the BI-Rate benchmark interest rate by 25 bps, from 6.25% to 6.00%.
BI Governor Perry Warjiyo stated that the BI Rate cut aims to support economic growth within the target range of 4.75-5.5% this year.
The BI Rate reduction is expected to trigger a decrease in bank interest rates, which will subsequently increase loan disbursement and drive economic growth.
"Indonesia's economic growth is already good. But, it needs to be further boosted to reach a higher level," said Perry during the BI RDG press conference via BI's YouTube channel on Wednesday (18/9/2024).
As of August 2024, BI recorded that loan disbursement grew 11.40%, down from 12.40% in July 2024. This August 2024 credit growth was the lowest in the last 5 months.
Additionally, the BI Rate cut will also lower the yields on government securities (SBN), which are a major source of financing for the state budget (APBN). With lower SBN yields, the interest payment burden will be lighter, allowing the government more flexibility to utilize the APBN for economic growth.
The BI Rate cut is also driven by the easing of monetary policy uncertainty in developed countries. U.S. inflation is expected to approach its medium-term target of 2%, following a slowdown in economic growth and rising unemployment. This development is expected to lead to a faster and deeper cut in the U.S. Federal Reserve's (The Fed) benchmark interest rate, the Fed Funds Rate (FFR), which serves as a global interest rate benchmark.
Perry predicted that the FFR will be cut 3 times this year, starting this September, and 4 times in 2025. The FFR reduction will further accelerate the strengthening of the Indonesian rupiah, which has been ongoing for the past month.
The main reason for BI's previous BI Rate hikes was to prevent a decline in the rupiah's exchange rate, so that economic growth could be kept under control. However, the latest RDG in September 2024 decided to cut the BI Rate, as inflation in Indonesia is expected to remain low and within the target range of 2.5±1%.
