Indonesia’s central bank, Bank Indonesia (BI), has cut its benchmark interest rate to 5 percent during the August Board of Governors’ Meeting, marking the second consecutive month of reductions. This move aligns with DBS Group Research’s earlier forecast that anticipated room for a more accommodative monetary policy in response to weakening growth momentum and global trade challenges.
“A number of high-frequency indicators of (economic) activity show weakening growth momentum in the second half of this year which, coupled with quite challenging global trade conditions, prompted BI to maintain pro-growth policies. The decision was made amid on-target inflation and a relatively stable rupiah,” said DBS Bank Senior Economist Radhika Rao.
DBS Group Research’s latest economic outlook for Q3 2025 highlights Indonesia’s resilience despite international disruptions. The analysis addresses both domestic and external macroeconomic factors influencing stability.
The report also examines pressures facing the US economy, including persistent inflation, effects from international trade tariffs, stricter immigration policies, calls for fiscal stimulus, rising asset prices, and political pressure on the Federal Reserve regarding its monetary policy. According to DBS Group Research, US economic growth is expected to slow in the latter half of 2025. The Fed may reduce rates by 50 basis points before year-end and potentially another 50 basis points in 2026.
While most Indonesian exports like textiles, furniture, and footwear are shipped to the US market, DBS analysts believe new US tariffs will have less impact on Indonesia compared to other ASEAN countries. Contributing factors include eased inflation allowing flexible monetary policy; increased government spending boosting consumption; and ongoing positive foreign direct investment (FDI) inflows reflecting investor confidence.
“Indonesia is in a relatively better position to deal with a new wave of US tariffs. Its diverse economic structure provides the necessary resilience,” Radhika added.
DBS Group Research also notes that negotiating free trade agreements—such as those removing tariff barriers for over 99 percent of Indonesian products bound for the US—and strong domestic policy support could further insulate Indonesia from external shocks. A comprehensive approach to foreign exchange management is also recommended.
Looking ahead, inflation in Indonesia is projected to remain within BI’s target range through 2025 and 2026. Monetary policy adjustments will consider exchange rate movements and developments in US interest rates as policymakers pursue an annual economic growth target near five percent. Despite a relatively high fiscal deficit, DBS expects it will stay below three percent of GDP. Economic growth could rise to 5.4 percent year-on-year by 2026—the highest since 2018—supported by stronger government revenues.
With expectations that the Federal Reserve will begin easing next month, BI is likely to keep its dovish stance into late 2025 while working toward full transmission of this year’s cumulative rate cuts into the broader economy.
Bond yields in Indonesia are falling amid expectations for further interest rate reductions. This trend is driven by oversubscription in Bank Indonesia’s Rupiah Securities (SRBI), surplus liquidity conditions, and sustained investor appetite for higher-yielding assets—particularly bonds with shorter maturities—though even longer-term yields have declined recently.
Maynard Arif, Equities Specialist at DBS Group Research, observed a shift among investors toward large-cap stocks seen as more resilient against global volatility: “Although the LQ45 and IDX30 indices have until July 2025 underperformed the broader index, current market valuations remain relatively attractive compared to other Asian countries, opening up opportunities for investors seeking stability and growth potential.”
Foreign direct investment flows—which had slowed—are expected to recover later this year as borrowing costs fall further and rupiah stabilizes. However, analysts caution that short-term volatility may persist due to changes in global monetary policy or geopolitical events.
The USD/IDR currency pair has corrected notably over recent months after peaking within its price channel—a development linked both to international financial markets and shifting sentiment around US monetary policy decisions. In response, DBS forecasts near-term consolidation as markets adapt both domestically and globally.
To assist clients navigating these uncertainties across currency markets or wider macroeconomic risks such as interest rates or tariffs fluctuations,DBS Global Financial Markets offers tailored solutions supported by market analysis tools and advisory services designed for informed decision-making across asset classes.Longer-term insights on ASEAN regional trends are also available from DBS research teams.
“The current movement of USD/IDR reflects complex global market dynamics and investor response to US monetary policy. Using the right strategy, customers can be better prepared to face volatility and take advantage of emerging opportunities,” said Executive Director & Head of Sales Global Financial Markets at PT Bank DBS Indonesia Muchammad Suryanatakusumah.
