UBS Economics-APAC Economic Comment _BI No move today, more growth ahead_...-118413962

ab23 October 2025Global ResearchAPAC Economic CommentBI: No move today, more growth aheadBI held the policy rate unchanged at 4.75%, first pause in four monthsBI kept the BI-Rate unchanged at 4.75% at its October policy meeting, in line with UBS expectations for a tactical pause but against consensus forecasts of a 25bp cut. From a peak of 6.25%, BI has implemented six rate cuts totalling 150bp in January, May, July, August, and September 2025, following its initial reduction in September 2024. Although BI noted room for further cuts, its current focus is improving monetary policy effectiveness and stabilizing the rupiah. Consequently, we anticipate BI to resume rate cuts in November, following the Fed's projected 25bp easing at the end of October. Our terminal rate projection remains at 4.0%, with BI likely to lower rates alongside the Fed due to the narrow rate differential. Additionally, BI announced liquidity incentives effective December 1, allowing banks to reduce reserves held at BI if they cut lending rates.Room for further relaxation of liquidity conditionsMonetary policy easing has extended beyond rate cuts to include liquidity boosting measures for promoting bank lending. They have been implemented through four primary channels: 1) Reductions in the effective reserve requirement 2) Reallocation of government deposits from BI to commercial banks 3) BI's purchases of government bonds in the secondary market 4) Maturing of SRBI. Comparatively, BI's purchases of government bonds and the maturing of SRBI have contributed less to liquidity expansion, compared to the effective RRR cuts via macroprudential liquidity incentives and the recent Rp200tn transfer of government deposits to state-owned banks. This transfer, equivalent to 2% of broad money, could amplify the money multiplier effect, given that ~60% of it has already been disbursed as loans. We believe there is scope to further relax liquidity conditions. Our calculations suggest an upper limit of Rp90-180tn in additional liquidity entering the system through reductions in the effective RRR, along with a potential reallocation of government deposits totaling Rp120-170tn. (Refer to Pages 2-3 for further details.)Fiscal policy to focus on execution, deficit to remain sub-3%During the post-decision briefing by BI, the Deputy Finance Minister underscored that while there are legislative proposals underway to review the law capping the budget deficit at under 3%, the 2026 deficit target would remain at 2.68% of GDP. The Deputy FM stressed that the government’s focus is on implementing and executing the budget in a timely manner rather than adjusting deficit boundaries. The government’s priority initiatives, such as the free nutritious meal program and Danantara’s role in driving FDI, are expected to continue having a 'catalytic' impact on economic growth, suggesting no shift in the broader direction of economic strategy. We upgrade GDP growth forecasts for 2025/26We raise our