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Bank Indonesia lowered the benchmark rate by 25bps to 4.75% in a surprise move, lowering rates for a third consecutive month, which highlighted that growth had overtaken rupiah stability as the key policy objective. The overnight deposit facility was cut by a bigger 50bps to 3.75%, widening the policy corridor to guide money market rates/ INDONIA lower. All hands are on deck to support growth by not only increasing liquidity but also lowering the cost, as evidenced by successive rate cuts, push to hasten policy transmission, reduction in SRBI issuances, coinciding with the government’s move to infuse liquidity and introduce “8+4+5” stimulus measures. The buffer from domestic real rates is ample (~240bps), with the recent stickiness in food inflation likely viewed as supply driven (and temporary) and thereby less consequential to rates. Exogenous forces are also conducive, with a resumption in the US Fed rate cuts to rewiden the ID-US benchmark rate differentials and be pro-rupiah stability.
Given the central bank’s recent action, dovish cues, signs of BI-government policy coordination and upcoming US Fed’s rate reductions, we build on one cut for BI in 4Q25 to 4.50% , and another 25bps in 1Q26 to 4.25%. The central bank opined that the negative output gap might close by late-2026 or early-2027 hinging on incoming data, suggesting rates will stay low in 2026 as well. Rupiah assets remain sensitive to domestic political developments, especially over signs of any compromise to the central bank’s independence. However, beyond kneejerk weakness, domestic markets appear to have given the benefit of the doubt to the administration, with the IDR moving in tight ranges (FX Daily: Giving Indonesia the benefit of the doubt). Bond yields, especially belly tenors, slipped further on Wednesday.
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