Economist: If BI Rate Drops, Will Strengthen Monetary Policy Transmission To The Real Sector

Bank Indonesia Building. (Karisa Aurelia Tukan/VOI)

JAKARTA - Head of the Center of Macroeconomics and Finance Indef M Rizal Taufikurahman assessed that if the benchmark interest rate (BI-Rate) was lowered, then this step would be strategic to strengthen the transmission of monetary policy to the real sector.

He estimates that the BI-Rate will be cut by 25 bps to 4.50 percent. With stable inflation below 3 percent, the real interest rate is still positive, giving space for cutting interest rates without suppressing the exchange rate excessively. According to him, working capital and investment loans also need additional boosts after its expansion slowed down in the first half of this year.

The 25 bps cut (projected cuts to 4.50 percent this month) will reinforce the sustainability of the easing cycle starting last September, while maintaining a policy alignment with a more expansive fiscal policy direction. That way, BI can strengthen the effect of policy synergy in maintaining growth without losing inflation credibility," Rizal said, quoted by Antara, Wednesday, October 22.

Rizal views that the risk of outflow is indeed increasing, but it is still under control as long as the cuts are carried out gradually and accompanied by an active triple intervention. The difference in interest rates with US dollars will be narrow, but BI foreign exchange reserves are still sufficient to hold back short-term volatility.

On the other hand, some of the outflows of the portfolio began to be accompanied by capital flows to equity and domestic bonds because Indonesia's premium yields were still relatively attractive.

"With BI records maintaining strict market communication and strengthening foreign exchange operations, cutting 25 bps will not shake stability. The risk is under control, the benefits of economic recovery are greater," he said.

However, delaying the reduction in interest rates is also not a wrong step. If BI chooses to hold interest rates at 4.75 percent, Rizal said that the consideration is clear, namely financial stability is prioritized in the midst of fluctuations in the outflow and exchange rate pressure.

The outflow of foreign portfolios that has occurred since the end of the third quarter has pushed the weakening of the rupiah closer to IDR 16,500 per United States (US) dollar.

In this situation, the wait and see attitude will signal to the market that BI remains oriented to maintaining exchange rates and foreign exchange reserves which had decreased to around 148 billion US dollars.

"The interest rate-resistant policy is a logical defensive distance until global pressure eases or the direction of the Fed's policy is clearer," said Rizal.

Today, BI will announce the direction of the benchmark interest rate policy in a press conference on the results of the Board of Governors' Meeting (RDG). At RDG in September 2025, BI-Rate was cut by 25 bps so that it was at the level of 4.75 percent.

With this decline, the central bank has lowered the benchmark interest rate six times with a total of 150 bps since last year. The decline occurred in September 2024, then in January, May, July, August, and September 2025.