Not Just a BI Rate Cut: Global Uncertainty and Trade Balance Risks Need Attention

Jakarta, investortrust.id – A lower benchmark interest rate, recently set by Indonesia's central bank, could mean cheaper loans and increased spending power for consumers, but the extent to which this translates into a much-needed economic boost is being closely watched by economists.

Josua Pardede, Chief Economist at Bank Permata, said decision by Bank Indonesia (BI), the country central bank, to cut its benchmark interest rate by 25 basis points (bps) to 5.75% last month stemmed from low inflation and the stability of the rupiah.

He viewed BI’s move is preemptive and forward-looking, aimed at supporting economic growth amid slowing household consumption, particularly among middle- and lower-income groups.

"The increase in consumption will depend on how much the rate cut translates into cheaper consumer credit and greater household liquidity," he said in a press statement on Sunday, February 2, 2025.

However, Josua noted that monetary policy effects have a time lag. The boost in consumption hinges on how effectively the lower interest rates encourage consumer lending and enhance household liquidity.

The rate cut also has the potential to stimulate private investment by reducing financing costs. However, its effectiveness will largely depend on market sentiment and the stability of the rupiah.

With this policy, BI aims to manage the rupiah's depreciation to maintain its attractiveness for foreign investors. However, global uncertainty and a widening current account deficit must be carefully handled to sustain investor confidence in Indonesia’s economy.

"Global uncertainty and the risks of a widening current account deficit must be managed properly to maintain investor confidence," Josua added.

Delayed Transmission to the Real Sector

Meanwhile, Tauhid Ahmad, Executive Director of the Institute for Development of Economics and Finance (Indef), noted that monetary policy transmission to the real sector typically takes three to six months. Banks do not immediately lower their lending rates following a policy rate cut.

"What are the consequences? When BI lowers interest rates, I see a delay in the reduction of lending rates and other related adjustments," he said.

Despite BI’s efforts to spur economic growth, several domestic challenges still loom over Indonesia’s economy in 2025. These include the planned increase in the Value-Added Tax (VAT) to 12% on luxury goods, the expansion of excise duties on packaged sugary drinks, higher premiums for the national health insurance program (BPJS Kesehatan), and potential hikes in fuel and liquefied petroleum gas (LPG) prices.

Shifting Labor Market Dynamics and Consumption Challenges

BCA economist David Sumual highlighted the impact of labor market shifts on household purchasing power. Many formal-sector workers have transitioned to informal jobs due to layoffs.

Additionally, labor-intensive industries like textiles are increasingly being displaced by capital-intensive sectors such as mining, which require fewer workers. This structural shift has made job creation more challenging, ultimately weakening household purchasing power.

To address this issue, David suggested that the government focus policies and investments on labor-intensive industries, which absorb more workers. Such measures would not only improve worker welfare but also strengthen overall purchasing power.

"The government should prioritize labor-intensive sectors by channeling more investment into these industries," he said.

Stricter tax policies could also suppress consumer spending. However, David believes that the VAT hike will have minimal impact on the general public since it primarily targets luxury goods.

On the other hand, the government is currently prioritizing household consumption over investment. Various social assistance programs and consumer incentives are being rolled out to boost purchasing power in the short to medium term.

Despite these efforts, foreign investment still faces challenges due to frequently changing policies and an inefficient bureaucracy. David noted that these issues have led investors to favor countries like Vietnam, which offer more stable and investment-friendly regulations.

"The government is currently focusing more on household consumption, unlike the previous administration, which prioritized investment. For example, the free nutritious meal program (MBG) is a direct effort to boost purchasing power in the short to medium term," David concluded.