A cool breeze blew in from Thamrin, Jakarta. The August 2025 Bank Indonesia (BI) Board of Governors Meeting (RDG), on Wednesday (20/8/2025), decided to lower the benchmark interest rate (BI Rate) by 25 basis points to 5.00%, the Deposit Facility rate to 4.25%, and the Lending Facility rate to 5.75%.
This decision is a stimulus to encourage economic growth to accelerate by considering the tendency of the United States central bank, The Federal Reserve (The Fed), will also reduce its benchmark interest rate, the Fed Fund Rate (FFR).
"This decision considers the need to encourage economic growth in accordance with the capacity of the economy," BI Governor Perry Warjiyo said at a press conference.
This is the second time in a row that BI has lowered the BI Rate. Previously at the July RDG, BI also lowered the BI Rate by 25 bps. Throughout this year, BI has cut interest rates four times with a total of 100 bps.
As usual, the Board of Governors made this decision for the needs of the domestic economy while considering global conditions.
By lowering the benchmark interest rate, the hope is that it can spur economic growth through cheaper lending rates. Citing data from the Central Statistics Agency (BPS), economic growth in the second quarter of 2025 reached 5.12%.
"This decision considers the need to encourage economic growth in accordance with the capacity of the economy," said Perry Warjiyo.
Current inflation, Perry continued, is also still within this year's target range of 1.5%-3.5%. In July 2025, inflation was at 2.37%. As for next year, inflation is also targeted to remain in the range of 1.5%-3.5%.
Perry explained that the decision to lower the benchmark interest rate also considered the downward trend of the FFR.
"In the US, inflationary pressures that tend to decline encourage stronger expectations of future FFR cuts. Nevertheless, in the short term, global financial market uncertainty continues and needs to remain vigilant in order to maintain the resilience of the domestic economy from the impact of global spillovers," Perry said.
Meanwhile, the rupiah exchange rate at the Jakarta Interbank Spot Dollar Rate (JISDOR), on Wednesday (20/8/2025), closed at Rp 16,291 per US dollar. Since the beginning of August, the rupiah exchange rate has strengthened 1.29%.
This exchange rate development was supported by the consistency of BI's stabilization policy and the continued inflow of foreign capital, especially to SBN instruments, as well as the increased conversion of forex to rupiah by exporters - in line with the strengthening of the implementation of government policies related to Natural Resources Export Proceeds (DHE SDA).
Going forward, the rupiah exchange rate is predicted to stabilize with a tendency to strengthen, supported by Bank Indonesia's commitment to maintain rupiah exchange rate stability, attractive yields, low inflation, and Indonesia's improving economic growth prospects.
Pro growth policy
Senior Economist and Associate Faculty of the Indonesian Banking Development Institute (LPPI) Ryan Kiryanto said, this decision clearly shows BI's firm stance in favor of economic growth.
"The pro-growth attitude is based on the rational consideration that both the realization and expectations of inflation are still within BI's target of 2.5% +/- 1, as well as the rupiah exchange rate which is relatively stable and within the range of the 2025 state budget assumption," Ryan said, Wednesday (20/8/2025).
He said that this policy was chosen with consideration of the need for stimulus to boost the national economy. The attitude of loose monetary policy or dovish policy is indeed needed to be able to help the real sector while harmonizing this monetary policy with government fiscal policy which is also countercyclical(pro growth). Not only that, BI also clearly mentioned that it opens up room for further BI Rate cuts.
Meanwhile, Teuku Riefky, a researcher at the Institute for Economic and Community Research (LPEM), Faculty of Business Economics, University of Indonesia (FEB UI), admitted that he did not expect BI to lower the benchmark interest rate. Previously, LPEM FEB UI recommended that BI maintain the BI Rate at 5.25%.
On the external side, the latest inflation and unemployment figures in the US were interpreted by investors as a signal of an interest rate cut by the Fed in the near future. Consequently, Indonesia experienced significant foreign capital inflows in the bond and stock markets in the past few weeks, reaching USD 1.08 billion and driving an appreciation of the rupiah exchange rate.
However, the implementation of Trump's tariffs could potentially trigger inflationary pressures in the coming months, and a rate cut by Bank Indonesia would exacerbate those inflationary pressures. Therefore, we view that Bank Indonesia should hold its benchmark rate at 5.25% this August.
Decrease in bank interest
Ryan from LPPI said that a decrease in the BI Rate could encourage economic growth, one of which was from a decrease in bank lending rates. Banking players will gradually adjust interest rates for both deposits and loans that are more accommodating.
"This stimulates world players to increase demand for credit facilities, especially productive credit, namely investment credit and working capital credit in line with production or business expansion," he said.
Bank Mandiri Corporate Secretary M. Ashidiq Iswara said, along with the decline in the BI Rate, his party will adjust lending and deposit rates in a prudent manner by considering internal liquidity conditions, market dynamics, and the direction of the prevailing monetary policy.
He added, Bank Mandiri views Bank Indonesia's move to reduce the BI Rate by 25 basis points to 5.00% as an accommodative monetary policy and in line with the need to maintain stability amid the dynamics of the global and domestic economy.
"The adjustment of the benchmark interest rate is expected to support the momentum of national economic growth while still paying attention to controlled inflation and a relatively stable exchange rate," he said.
Dian Ediana Rae, Chief Executive of Banking Supervision at the Financial Services Authority (OJK), said that the reduction in the BI Rate, the acceleration of government spending, and several government programs are believed to encourage lending, maintain food stability, and help people's purchasing power.
Dian explained that the decline in the BI Rate has been followed by a decline in bank interest rates. Compared to the previous year, the weighted average lending rate fell 11 bps to 8.99%, mainly driven by the decline in interest rates for productive loans.
In addition, on a trend basis, the weighted average lending rate has declined compared to the previous few years. In terms of fund collection, the weighted average interest rate on deposits also began to decline compared to last month.
Generally, a decrease in the BI Rate will be followed by a decrease in lending rates with a time lag of several periods. "Therefore, lending rates are expected to continue to decline in response to the BI Rate cut in 2025," Dian continued.
