Bank Indonesia (BI) has doubled down on its pro-growth stance, cutting the benchmark interest rate by 25 basis points to 5.00% at its August 2025 Board of Governors Meeting. This marks the third cut this year, reducing rates by a total of 75 bps as Southeast Asia’s largest economy seeks to balance domestic resilience with shifting global monetary dynamics.

The move puts BI ahead of the U.S. Federal Reserve, which is widely expected to lower its Fed Funds Rate later this year.

“This decision considers the need to boost economic growth in line with the economy’s capacity,” said BI Governor Perry Warjiyo during a press conference.

This marks the second consecutive time BI has reduced the BI Rate. Previously, at the July RDG, BI also cut the BI Rate by 25 bps. Throughout this year, BI has lowered interest rates three times, totaling 75 bps.

As usual, the Board of Governors made this decision to address domestic economic needs while considering global conditions.

By lowering the benchmark interest rate, it is expected to stimulate economic growth through cheaper credit rates. According to data from the Central Statistics Agency (BPS), economic growth in the second quarter of 2025 reached 5.12%.

“This decision considers the need to boost economic growth in line with the economy’s capacity,” said Perry Warjiyo.

Inflation at present, Perry continued, is still within this year’s target range of 1.5%–3.5%. In July 2025, inflation stood at 2.37%. Next year, inflation is also targeted to remain within the 1.5%–3.5% range.

Perry explained that the decision to lower the benchmark interest rate also considered the expected decline in the FFR.

“In the U.S., easing inflationary pressures are strengthening expectations of a future FFR cut. Nevertheless, in the short term, global financial market uncertainty persists and must be carefully monitored to safeguard domestic economic resilience from global spillovers,” Perry said.

Meanwhile, the rupiah exchange rate at the Jakarta Interbank Spot Dollar Rate (JISDOR) closed at IDR 16,291 per U.S. dollar on Wednesday (August 20, 2025). Since early August, the rupiah has strengthened by 1.29%.

This exchange rate development is supported by the consistency of BI’s stabilization policies and continued inflows of foreign capital, particularly into government securities (SBN), as well as increased conversion of foreign currency to rupiah by exporters—along with the strengthened implementation of government policies on Export Proceeds from Natural Resources (DHE SDA).

Going forward, the rupiah is expected to remain stable with a strengthening tendency, supported by Bank Indonesia’s commitment to maintaining rupiah stability, attractive yields, low inflation, and improving prospects for Indonesia’s economic growth.

Pro-Growth Policy

Senior Economist and Associate Faculty at the Indonesian Banking Development Institute (LPPI), Ryan Kiryanto, stated that this decision clearly demonstrates Bank Indonesia’s firm stance in supporting economic growth.

“A pro-growth approach, based on the rational consideration that both realized and expected inflation remain within BI’s target of 2.5% +/- 1, and the rupiah exchange rate is relatively stable and within the assumptions of the 2025 state budget,” said Ryan on Wednesday (August 20, 2025).

He explained that this policy was chosen considering the need for a stimulus to boost the national economy. This loose or dovish monetary policy is indeed necessary to stimulate the real sector while harmonizing monetary policy with the government’s countercyclical (pro-growth) fiscal policy. Moreover, BI clearly indicated that there is room for further reductions in the BI Rate.

Meanwhile, Teuku Riefky, a researcher at the Institute for Economic and Social Research (LPEM) at the Faculty of Economics and Business, University of Indonesia (FEB UI), admitted he did not expect BI to lower the benchmark interest rate. Previously, LPEM FEB UI had recommended that BI maintain the BI Rate at 5.25%.

From the external side, recent inflation and unemployment figures in the U.S. were interpreted by investors as signals of an imminent rate cut by The Fed. Consequently, Indonesia experienced significant foreign capital inflows in the bond and stock markets over the past few weeks, reaching USD 1.08 billion and pushing the rupiah to appreciate.

However, the implementation of Trump-era tariffs could potentially trigger inflationary pressures in the coming months, and a BI rate cut could exacerbate these pressures. Therefore, in our view, Bank Indonesia should have kept its benchmark rate at 5.25% in August.

Bank Interest Rate Cut

Ryan from LPPI stated that the BI Rate cut could boost economic growth, partly through lower bank lending rates. Banking players will gradually adjust both deposit and loan interest rates to be more accommodative.

“This stimulates business actors to increase demand for credit facilities, particularly productive loans, such as investment loans and working capital loans, in line with the expansion of their production or business,” he said.

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Corporate Secretary of Bank Mandiri, M. Ashidiq Iswara, stated that following the BI Rate cut, the bank will prudently adjust its lending and deposit interest rates, taking into account internal liquidity conditions, market dynamics, and the prevailing monetary policy direction.

He added that Bank Mandiri views Bank Indonesia’s decision to lower the BI Rate by 25 basis points to 5.00% as an accommodative monetary policy aligned with the need to maintain stability amid global and domestic economic dynamics.

“This benchmark rate adjustment is expected to support the momentum of national economic growth while still considering controlled inflation and a relatively stable exchange rate,” he said.

The Chief Executive of Banking Supervision at the Financial Services Authority (OJK), Dian Ediana Rae, stated that the BI Rate cut, accelerated government spending, and several government programs are believed to encourage credit distribution, maintain food stability, and support public purchasing power.

Dian explained that the BI Rate cut has been followed by a decline in banking interest rates. Compared to the previous year, the weighted average lending rate fell by 11 bps to 8.99%, mainly driven by lower productive loan rates.

Additionally, the trend shows that the weighted average lending rate has decreased compared to previous years. On the funding side, the weighted average deposit interest rate has also started to decline compared to last month.

Generally, a BI Rate cut is followed by a decrease in lending rates after a few periods. “Therefore, lending rates are expected to continue declining in response to the BI Rate cut in 2025,” Dian added.