By Gayatri Suroyo and Stefanno Sulaiman

JAKARTA (Reuters)

Indonesia’s central bank paused its easing cycle on Wednesday, as expected, while urging commercial banks to reduce lending rates and boost credit growth to support the economy.

Economists stated that the central bank is likely to continue its gradual pace of monetary easing, considering challenges from tariffs and geopolitical uncertainties affecting Southeast Asia’s largest economy. Some predict an additional 50 basis points of cuts in the second half of the year.

On Wednesday, Bank Indonesia held the benchmark 7-day reverse repurchase rate at 5.50%, aligned with the expectations of 21 out of 31 economists polled by Reuters. Its two other main rates were also unchanged.

Bank Indonesia has reduced interest rates three times since September and downgraded its economic growth outlook twice this year, citing challenges such as slowing domestic demand and precarious global growth stemming from U.S. tariffs and conflicts.

Bank Indonesia maintained its 2025 growth forecast of 4.6% to 5.4%, anticipating improved economic activity in the latter half of the year.

Governor Perry Warjiyo, at a press conference, noted that Bank Indonesia remains open to further lowering borrowing costs, as inflation is expected to stay within target this year and next, while household spending and investment require stimulus.

Warjiyo mentioned, “The (rate cut) timing will depend on global conditions, particularly regarding rupiah stability.”

He urged banks to adhere to Bank Indonesia’s easing measures and reduce their credit interest rates, emphasizing that loan growth slowed to 8.43% in May, the slowest since June 2023, based on LSEG data.

Bank Indonesia has eased banks’ reserve requirements, providing additional liquidity of 372 trillion rupiah ($22.83 billion) to lenders, according to Warjiyo.

Annual inflation was 1.6% in May, close to the lower end of Bank Indonesia’s target range of 1.5% to 3.5%, which some analysts indicate points to sluggish household spending.

DBS economist Radhika Rao commented, “Despite a benign inflation outlook, policymakers likely view recent Middle East tensions and their impact on regional currencies with concern,” predicting total cuts of 50 basis points this year to a terminal rate of 5%.

To stimulate demand, the government has introduced a $1.5 billion incentive package that includes transportation subsidies and cash and food handouts for June and July.

(Exchange rate: $1 = 16,295 rupiah)