Bank Indonesia Expects Fed Rate Cuts in 2025

JAKARTA, investortrust.id – Perry Warjiyo, the governnor of Bank Indonesia, the country's central bank, Governor Perry Warjiyo has shared the central bank’s latest outlook on US monetary policy, forecasting a 25-basis-point (bps) cut to the Federal Funds Rate in 2025. Currently, the rate stands at 4.25%–4.50%.

“We now anticipate only one 25-basis-point cut to the Fed Funds Rate this year. That projection is already factored into our calculations,” Perry said during a press conference following the Board of Governors Meeting (RDG) at BI’s Thamrin Building in Jakarta on Wednesday, January 15, 2025.

This updated projection refines BI’s earlier estimate, delivered in 2024, which suggested the Fed might lower its benchmark rate by 50 to 75 bps in 2025. Perry noted that BI considers global economic indicators, including Fed policy, when setting its own benchmark rate. Following the January RDG, BI lowered its rate by 25 bps to 5.75%.

The decision, Perry explained, was influenced by clarity around U.S. economic policy following Donald Trump’s election as U.S. President and the anticipated direction of the Federal Reserve's monetary policy.

Fed Officials Signal Potential Cuts

Federal Reserve Governor Christopher Waller suggested on Thursday, January 16, 2025, that the central bank might cut rates multiple times this year if inflation declines as expected.

Waller predicted the first reduction could occur in the first half of the year, followed by additional cuts contingent on favorable data related to inflation and unemployment.

“As long as the data supports improvements in inflation or shows a consistent trajectory, I can certainly foresee rate cuts happening sooner than the market expects,” Waller said in an interview with CNBC.

When asked how many rate cuts might occur, Waller replied, “It all depends on the data. Significant progress could lead to three or four cuts, each by a quarter-point. However, if the data falls short, we might see only two cuts or even just one if inflation proves stubborn.”

Market Reactions to Waller’s Statement

Waller’s comments prompted traders to increase bets on more aggressive rate reductions. According to CME Group data, the probability of a rate cut in May rose to 50%, with June emerging as a more likely candidate. Expectations for a second cut by year-end climbed to 55%, up 10 percentage points after Waller’s remarks.

Waller’s optimism is rooted in his belief that inflation will continue to decline throughout 2025. While recent months have shown resilience in some core prices, the Consumer Price Index's core inflation rate—excluding food and energy—fell to 3.2% in December, down 0.1 percentage points from the previous month but still above the Fed’s 2% target.

“I believe inflation will steadily approach our target. The rigidity in annual inflation we saw in 2024 should begin to ease,” Waller stated. “This gives me slightly more confidence in the potential for inflation to decrease, compared to some of my colleagues.”

Cautious Approach from the FOMC

In December, members of the Federal Open Market Committee (FOMC) projected two rate cuts for 2025. However, post-meeting commentary reflected a cautious and measured stance.

The next FOMC meeting is scheduled for January 28–29, with markets currently predicting minimal likelihood of any immediate policy changes.

“For January, we’ll need to evaluate the situation. There’s no rush to act,” Waller said.