EVERY decision by Bank Indonesia (BI) regarding the benchmark interest rate always appears to be a kind of heartbeat for the national economy. When BI decided to maintain the benchmark interest rate at 4.75 percent in October 2025, the public immediately interpreted many things, at least: inflation remains under control, growth is fairly moderate, and rupiah stability remains a priority.
But behind this seemingly simple number lies a complex network of decisions. The interest rate is a message to money markets, investors, and households. When BI holds rates, it is essentially weighing two sides of the policy balance sheet—stability and growth.
Globally, the 2025 economy is not an easy year. Geopolitical tensions, supply chain changes, and fluctuations in energy and food prices continue to create waves of uncertainty. The United States has begun to lower interest rates after a long tightening period, while Europe remains cautious. In this landscape, Indonesia has chosen a conservative-adaptive stance: not rushing to stimulate growth through monetary easing, but also not allowing high interest rates to excessively constrain productive credit.
This BI decision can be read as a strategy of “waiting with a clear direction.” The central bank does not rule out future rate cuts, but it wants to ensure that macroeconomic fundamentals are strong enough. The basic principle is simple: stabilize the rupiah first before loosening liquidity, because exchange rate stability often determines market confidence perception more than growth figures alone.
Interest Rates Down, Economy Up?
Let us discuss a common view—often exaggerated—that if interest rates fall, the economy will automatically grow. In theory, this is valid: lower rates reduce borrowing costs, stimulate consumption and investment, create a multiplier effect, and ultimately expand employment. However, in practice, the relationship is not always aligned. Why?
First, monetary policy transmission is not immediate. From BI’s decision to changes in commercial bank lending rates, there is usually a time lag and resistance. Banks still consider credit risk and capital adequacy before lowering loan rates. Many business actors complain that although the policy rate has fallen, lending rates have not followed.
Second, economic actors’ behavior also determines policy effectiveness. When global conditions are uncertain, large companies tend to delay expansion even if credit is cheap. They prefer to strengthen cash flow rather than invest in sectors with uncertain demand. Households may also behave cautiously: saving more and spending less.
Third, there are psychological and structural factors. Consumers do not only respond to interest rates but also to expectations about the future: whether jobs are secure, prices are stable, and the government is credible. Without a sense of security, monetary stimulus can “flow to the wrong place”: accumulating in deposits or financial markets instead of the real sector.
Indonesia has also experienced such a paradox. During the 2020–2021 pandemic, BI lowered interest rates to a record low of 3.5 percent, yet productive credit did not surge. Many companies instead repaid loans or held back investment. This means monetary policy is only effective when there is confidence that the economic future is predictable and risks are manageable.
Stability and Growth
In this context, BI’s decision to maintain the benchmark rate at a moderate level can be seen not as reluctance, but as strategic caution. There are three main reasons why this strategy should be understood proportionally.
First, rupiah stability remains the main fortress. With a relatively low current account deficit and foreign exchange reserves above USD 130 billion, external pressure has eased, but global sentiment can change quickly. When foreign capital flows out in large amounts (such as the Rp 2.7 trillion outflow at the end of September 2025), the exchange rate can come under pressure. Too low an interest rate would actually increase this risk.
Second, Indonesia’s core inflation remains within a safe corridor (around 2.6–2.8 percent)—but food and energy price pressures still exist. In this situation, BI chooses to maintain inflation credibility: slightly tight is better than losing market confidence. If inflation becomes uncontrolled, the social and economic costs can be far higher than the loss of short-term growth.
Third, coordination between monetary and fiscal policy is now much better than a decade ago. The government is increasing infrastructure spending and social protection to cushion slowdown, while BI ensures adequate banking liquidity. This pattern reflects a philosophical shift: not just about “high or low interest rates,” but about maintaining policy rhythm so they do not cancel each other out.
This balance is very important amid economic transformation. Indonesia is shifting from a commodity-based economy to value-added industry and digital sectors. Sustainable growth requires long-term stability, not short-term euphoria. Interest rates are not an accelerator pedal; they are a steering wheel that determines direction.
Conclusion
In economic politics, restraint is often more difficult than action. Lowering interest rates may create more optimistic headlines, but maintaining stability in the midst of a storm is a more courageous decision. Good monetary policy is not measured by how often it changes, but by how trusted it is in maintaining economic direction. BI appears to be writing a new chapter in Indonesia’s economic policy: a chapter where calmness becomes a strategy, not a weakness.
Amid global uncertainty, BI’s stance deserves appreciation—as long as it is followed by structural reforms that make credit truly productive, investment easier, and society more confident about their economic future.
Ultimately, the main function of interest rates is not only to regulate the price of money, but also to signal trust and stimulate optimism. And in a modern economy, trust and optimism are currencies whose value is often stronger than the rupiah itself.
The author is Professor of Economics, Dean of FEB Universitas YARSI, and Director of Research at GREAT Institute.
