BRIDS Macro: BI and Fed Deliver 25 bps Rate Reductions in Sep-25

BRIDS Macro

BI and Fed Deliver 25 bps Rate Reductions in Sep-25 – Our Key Takeaways

Bank Indonesia: The Third Stright Surprise Rate Cut

Bank Indonesia lowered its policy rate by 25 bps to 4.75%, marking the sixth cut since Sep-24 (a total of 150 bps) and the lowest level since 2022. Similar to the Jul and Aug moves, Sep’s rate cut was also a surprise, as consensus had expected BI to maintain the rate given recent pressure on the IDR. In our view, this further reinforces BI’s pro-growth stance, aligning with the government’s renewed fiscal expansion led by the new Finance Minister.
Similar to last month’s cut, BI further reiterated weak credit growth as one of the reasons for the need to adjust rates lower. Corporates remain in a “wait-and-see” mode, with undisbursed loans totaling IDR 2,372 tn (22.7 % of available credit), mostly in working-capital facilities. The transmission of BI’s rate cuts to the banking system has also been slow: average bank deposit rates have dropped only 16 bps compared with BI’s 125-bp reduction, while lending rates have eased just 7 bps.
As such, lowering rates further could help to propel broader rate reduction across the system, especially as liquidity has largely improved following the Ministry of Finance’s recent policy of placing idle government cash in state-owned banks. (Please refer to our report “ The New Paradigm” – 15 Sep).
BI reaffirmed support for fiscal expansion, including government fund placements in banks. Aside from rate cuts, BI is also injecting liquidity through: Lowering SRBI outstanding by IDR 200tn, triple intervention (including IDR 217.1tn additional SBN holdings as of Sept 16), Bank liquidity incentives totaling IDR 384tn.

The Sep FOMC Meeting: The Fed Finally Cuts Rates

“You can think of this, in a way, as a risk management cut” - J Powell at Sep-25 FOMC

The Fed finally delivered a widely expected 25-bp rate cut and signaled that two additional reductions are likely before year-end, reflecting growing concern over a cooling US labor market even as inflation remains elevated. The decision passed with an 11-to-1 vote, showing limited dissent. Newly appointed Governor Stephen Miran cast the only dissenting vote, favoring a more aggressive 50-bp cut to counter softening employment trends.
Jerome Powell mentioned that the committee is attentive to the risks on both sides of its dual mandate and judges that downside risks to employment have risen. He added that the rate cut is intended more as “risk management,” a statement perceived as less dovish.

Key points from the latest SEP and Dot Plot projections:

Projections released following the meeting on general economic conditions saw slightly faster economic growth than was projected in June, a reversal from stagflation trend in the past several SEP releases. The GDP forecast for 2025-27 was higher than previous Jun’s projection, while unemployment forecast is lower (details in the link above).
The dot plot pointed to two more cuts until year end, although there’s wide level of disparity, with the lowest dot points to 1.25 ppt rate reduction until year end. In 2026, the plot indicated one cut in 2026, considerably less from the current market pricing of 3 rate cut next year.

The key conclusions – Our view

With the latest surprise rate cut by BI, the benchmark rate has now reached our optimistic 2025 case, suggesting that government bond yields could move closer to the 6.2 % range. While BI’s aggressive easing might pose some risk to the IDR outlook, the recent confirmation of a Fed rate cut should provide tailwind for currency stability, especially as the Fed remains “behind the curve.”

To reduce market volatility, BI will need to maximize its triple interventions, while carefully balancing efforts to minimize the risk of excessive liquidity absorption, which would counter to the government’s recent fiscal push to place liquidity in state-owned banks. BI’s easing measures, combined with the Ministry of Finance’s fiscal drive, could support stronger demand growth, improve risk perception, and eventually foster credit expansion.