Indonesia’s central bank is expected to reduce interest rates in the coming months to support economic growth amid rising trade tariffs and global uncertainties.

This follows three consecutive meetings where the central bank maintained its benchmark rate.

Economists predict a quarter-point reduction in the benchmark rate to 5.5% by the end of the second quarter, according to a Bloomberg survey.

A further cut of 25 basis points is anticipated in the third quarter, bringing the rate to 5.25% by the end of the year.

🔗 Source: Bloomberg

🧠 Food for thought

1️⃣ Indonesia’s monetary easing follows historical pattern of crisis-driven policy shifts

Bank Indonesia’s expected rate cut continues a long tradition of the country adapting monetary policy in response to external economic pressures, particularly currency volatility.

During the 1997-1998 Asian Financial Crisis, Indonesia received a US$43 billion IMF bailout that came with strict conditions and saw the rupiah lose half its value in just days1.

This historical episode demonstrates how external shocks have repeatedly forced Indonesia’s hand on monetary policy, with current concerns reflecting past patterns where trade tensions trigger currency depreciation.

The rupiah’s recent fall to “an all-time low against the dollar” echoes previous currency crises, including the dramatic 1998 depreciation when the rupiah plummeted from 2,400 to 16,000 against the dollar2.

While Bank Indonesia now operates with greater independence and reserves than in the 1990s, the current situation highlights how external trade pressures continue to constrain Indonesia’s monetary policy options, creating a familiar tension between supporting growth and stabilizing the currency.

2️⃣ Currency depreciation historically hits Indonesia’s urban poor hardest

The recent all-time low of the rupiah against the dollar raises concerns about disproportionate impacts across Indonesian society based on clear historical precedent.

During the 1998 crisis, food prices rose dramatically when the currency collapsed, with January 1998 alone seeing price increases equal to the previous six months combined—creating a severe burden specifically on low-income urban households2.

Research shows that while rural households have historically been somewhat insulated from currency shocks due to their agricultural production, urban poor families bear the brunt of inflationary pressures during periods of rupiah weakness2.