In a strategic move to bolster economic growth while maintaining stable inflation levels, Bank Indonesia has announced a reduction of its key policy rate from 6.25% to 6.00%. This decision, made during the bank's latest announcement on Wednesday, reflects the current economic landscape characterized by moderate inflation and the strength of Indonesia's currency, the rupiah.
This marks the first reduction in interest rates since February 2021. In addition to lowering the key policy rate, Bank Indonesia also adjusted the deposit facility rate, bringing it down by 25 basis points to 5.25%. Similarly, the lending facility rate has been decreased to 6.75%, with indications that more cuts could be considered in the foreseeable future.
The central bank detailed that these rate adjustments are a response to anticipated low and stable inflation projections for the years 2024 and 2025, which are expected to remain within the target corridor of 2.5% plus or minus 1%. "The decision to lower interest rates is underpinned by the necessity to stimulate economic growth and ensure the stability of the rupiah," commented Bank Indonesia in a prepared statement.
The central bank further assured stakeholders that it will remain vigilant and responsive to economic indicators that could warrant further adjustments to the policy rate. Historically, similar to many global central banks, Bank Indonesia initially lowered interest rates during the pandemic to counteract economic weaknesses.
Following the pandemic, rates were incremented back up in response to rising inflation rates. At its lowest point, the key policy rate was set at 3.5% during 2021-2022, before being gradually raised to a peak of 6.25% in April of this year. Consumer price inflation in Indonesia reached a high of 5.95% in September 2022; however, it has since moderated and has maintained a level below 3% since May.
The strength of the rupiah has been notable as it has appreciated by approximately 7% against the US dollar since June, signaling a favorable economic condition amidst global currency fluctuations. Looking ahead, the Indonesian economy is projected to experience a GDP growth range between 4.7% and 5.5% for the year 2024, according to Bank Indonesia's forecasts.
The central bank is committed to playing a proactive role in fostering economic expansion amidst these promising projections. Bank Indonesia emphasized the importance of sustaining growth through both demand and supply-side initiatives. By reinforcing its policy framework to support economic acceleration, the bank aims to work synergistically with fiscal measures implemented by the government.
The ongoing collaboration between monetary and fiscal policies is deemed crucial for fostering an environment conducive to sustainable growth. As Indonesia navigates the complexities of post-pandemic recovery, the steps taken by Bank Indonesia are pivotal in ensuring economic resilience and stability..