TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search results
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search resultsAnalysis: Debate grows over government sway as BI & Fed slash rates
Change text size
Gift Premium Articles
to Anyone
Share the best of The Jakarta Post with friends, family, or colleagues. As a subscriber, you can gift 3 to 5 articles each month that anyone can read—no subscription needed!
The Bank Indonesia logo adorns the gate of the central bank's headquarters in Jakarta in this undated photograph. (Antara/File)
B
ank Indonesia (BI) cut its benchmark interest rate for the fifth time this year, lowering it to 4.75 percent just a day before the United States Federal Reserve (the Fed) announcement. The move reflected BI’s bet that the US monetary authority would also ease its policy. A day later, the Fed indeed cut the federal funds rate (FFR) for the first time in 2025. Both central banks’ decisions were driven by concerns over slowing economic growth but also sparking debate on government influence in central bank decisions.
BI reduced the BI rate by 25 basis points (bps) to 4.75 percent following its Sept. 16–17 board of governors meeting, bringing the cumulative cuts in 2025 to 125 bps. At the same time, the central bank lowered the deposit facility rate by 50 bps to 3.75 percent and the lending facility rate by 25 bps to 5.5 percent. Governor Perry Warjiyo stressed that the decision was aimed at bolstering growth amid stable inflation, which is projected to remain within the 1.5–3.5 percent range in both 2025 and 2026, and a stable rupiah exchange rate.
Inflationary pressures remain subdued. Indonesia’s consumer price index rose 2.31 percent year-on-year (yoy) in August 2025, comfortably within BI’s target range, while core inflation slowed to 2.17 percent yoy. Credit composition has shifted, with working capital loans increasing from 32.6 percent of total loans in December 2024 to 34 percent in August 2025. In contrast, investment loans declined from 12.8 percent to 11.9 percent, and consumer loans slipped to 10 percent. BI also projected a favorable balance of payments (BoP) position this year, with the current account deficit expected to remain low at 0.5–1.3 percent of GDP.
As expected, the Fed cut its FFR by 25 bps to the 4.0–4.25 percent range during its Federal Open Market Committee (FOMC) meeting. The decision reflected concerns over weaker job growth and persistent inflationary pressures. The Fed’s “dot plot” revealed a divided outlook: 10 of 19 FOMC members projected two further rate cuts in 2025, likely in October and December, nine expected only one, while one sought no further cuts. Despite pressure from the US government for steeper easing, Fed Chair Jerome Powell reiterated the central bank’s commitment to independence.
Indonesia’s fiscal authorities have also turned expansionary. The Finance Ministry has redirected Rp 200 trillion (US$11.93 billion) of idle government funds held at BI to state-owned banks in order to inject liquidity into the real economy. Of the funds, Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia each received Rp 55 trillion, while Bank Tabungan Negara and Bank Syariah Indonesia obtained Rp 25 trillion and Rp 10 trillion, respectively.
In addition to the Rp 200 trillion fund reallocation and the BI rate cut, Bank Indonesia (BI) has also agreed to a burden sharing mechanism to support government programs such as the 3 Million Houses initiative and the Merah Putih Village Cooperative (KDMP). Under this scheme, BI shares the interest burden by evenly distributing the financing costs of government securities (SBN) issued for these programs, after deducting the returns generated from the government’s fund placements in domestic financial institutions. This arrangement underscores the extent of BI’s concessions in supporting fiscal priorities, blurring the line between fiscal and monetary responsibilities.
The Fed’s easing is expected to lower yields on US Treasuries, potentially spurring capital outflows from developed markets into equities and emerging economies such as Indonesia. Yet the effectiveness of BI’s monetary easing remains constrained by sluggish transmission. Banks’ prime lending rates rose 10 bps to 9.23 percent in July 2025 from 9.13 percent in September 2024, even as BI lowered its policy rate by 100 bps over the same period. An expansionary fiscal policy, amid these transmission lags, could undermine the effectiveness of monetary easing.
