Bank Indonesia Holds Rates Amid Global Trade Tensions and Rupiah Weakness

Indonesia’s central bank, Bank Indonesia (BI), has opted to maintain its key interest rate at 5.75 percent, a decision shaped by a weakening rupiah and escalating global economic uncertainties driven by trade disruptions. Announced after a two-day policy meeting, the move reflects a cautious approach as the bank grapples with external pressures threatening the nation’s economic growth.

Global Trade Wars Cast a Shadow

At a press conference in Jakarta, BI Governor Perry Warjiyo highlighted the impact of global trade tensions, particularly the United States’ recent tariff policies. Earlier this month, US President Donald Trump introduced a 10 percent blanket tariff on nearly all imports, with an additional 32 percent tariff targeting countries like Indonesia, where the US faces a trade deficit. Although a 90-day pause on the policy was announced—allowing negotiations with affected nations, including Indonesia—the tariffs have already sparked retaliatory measures from major economies such as China, Canada, and the European Union.

“Global economic uncertainties have been pushed higher by America’s reciprocal tariff policy” said Governor Warjiyo, noting that BI has revised its global growth projection downward from 3.2 percent to 2.9 percent. These tensions are not only disrupting trade volumes but also shifting global investment patterns. Warjiyo pointed out that US financial assets are now perceived as less safe compared to those in Japan and Europe, as well as gold, reflecting a broader decline in risk appetite. For emerging markets like Indonesia, this translates to reduced foreign investment and added pressure on local currencies, including the rupiah.

Rupiah Under Strain

The rupiah has been hovering near recent lows, trading at Rp 16,871 per US dollar as of Wednesday, a 3.6 percent decline year-to-date. This places it uncomfortably close to the psychological threshold of Rp 17,000 and not far from the historic low of Rp 17,300 recorded during the 1998 Asian Financial Crisis. On April 8, the currency briefly slipped to Rp 17,051 per dollar, according to financial data from Morningstar, before recovering slightly to the Rp 16,700-16,900 range.

Warjiyo described the rupiah’s current value as consistent with “domestic economic fundamentals” but acknowledged the challenges posed by global shifts. A potential strategy to bolster the currency would be to raise interest rates, which could attract foreign capital. However, such a move risks stifling economic growth by increasing borrowing costs for businesses—a critical concern for a country aiming to maintain momentum in its recovery.

Economic Growth Forecasts Dim

BI has maintained its projection for Indonesia’s gross domestic product (GDP) growth this year at between 4.7 and 5.5 percent, though Warjiyo cautioned that the final figure is likely to fall “slightly below the middle” of this range due to recent global developments. This more pessimistic outlook aligns with the International Monetary Fund’s latest World Economic Outlook report, released on Tuesday, which downgraded its forecast for Indonesia’s GDP growth to 4.7 percent from an earlier estimate of 5.1 percent.

The trade war’s ripple effects are a significant factor in these revisions. Indonesia, as a major exporter, is particularly vulnerable to reduced global demand and disruptions in supply chains. Finance Minister Sri Mulyani Indrawati has publicly warned that US tariffs pose a “serious threat” to the country’s GDP growth, underscoring the interconnected nature of global trade and local economic stability.

A Cautious Monetary Stance

BI’s decision to hold interest rates steady has drawn mixed reactions from economists. Hosianna Evalita Situmorang, an economist at Bank Danamon, described the move as “cautious” in her analysis, suggesting that BI may have room to cut rates in July if external pressures ease. Meanwhile, Josua Pardede, chief economist at Bank Permata, argued that it is “still premature to implement a policy rate cut” given the ongoing uncertainties surrounding the trade war. “Looking ahead, there will indeed be room for BI-Rate cuts. However, the timing must be carefully considered” said Pardede, emphasizing the need for a consistent decline in global tensions before any easing of monetary policy.

Pardede also noted that a clear signal from the US Federal Reserve about pursuing “a more aggressive path in cutting” the Federal Funds Rate could provide BI with the flexibility to lower its own rates by as much as 50 basis points before the year ends. Such a move would depend heavily on international developments, particularly in the US-China trade conflict, which shows no immediate signs of resolution.

Broader Implications for Indonesia

The interplay between global trade policies and domestic economic stability places Indonesia in a delicate position. Raising interest rates to defend the rupiah could dampen growth at a time when businesses are already facing higher costs and reduced export opportunities. Conversely, cutting rates to stimulate the economy risks further weakening the currency, potentially spurring inflation and eroding consumer purchasing power. For now, BI appears to be adopting a wait-and-see approach, balancing these competing priorities while monitoring international developments.

The rupiah’s vulnerability is compounded by broader trends in currency markets. The US dollar, despite its own challenges, remains a dominant force, though the dollar index—measuring the greenback against six major currencies—has slipped 8.5 percent year-to-date. This decline reflects investor unease with US trade policies, yet it offers little relief to emerging market currencies like the rupiah, which continue to bear the brunt of capital outflows.

Navigating Uncertainty

Indonesia’s economic challenges are emblematic of the broader difficulties faced by emerging markets in an era of heightened global uncertainty. The country’s reliance on exports—ranging from commodities like palm oil to manufactured goods—makes it particularly sensitive to fluctuations in trade volumes and foreign investment. At the same time, domestic factors, such as infrastructure development and consumer spending, play a crucial role in sustaining growth, even as external headwinds intensify.

For policymakers at BI, the path forward involves a delicate balancing act. Supporting the rupiah without undermining growth requires not only careful monetary policy decisions but also coordination with fiscal authorities to address structural issues, such as trade deficits and supply chain resilience. The government’s commitment to maintaining trade relations with China, despite the US-China trade war, signals an intent to diversify economic partnerships—a strategy that could mitigate some of the risks posed by US tariffs.

Looking Ahead

As Indonesia navigates this complex economic landscape, the coming months will be critical. The 90-day pause on US tariffs offers a temporary reprieve, but the outcome of negotiations with Washington remains uncertain. Meanwhile, BI’s monetary policy decisions will continue to be shaped by both domestic needs and global dynamics, with the potential for rate cuts hinging on a stabilization of international trade tensions.

For now, the central bank’s cautious stance reflects a pragmatic recognition of the challenges ahead. As Governor Warjiyo and his team monitor the evolving situation, the question remains whether Indonesia can weather this storm without sacrificing its hard-won economic progress. With the rupiah under pressure and growth forecasts dimming, the stakes for Southeast Asia’s largest economy have rarely been higher.