Indonesia And EU Strike Trade Deal Removing Tariffs On 80% Of Exports

Following years of negotiations, Indonesia and the European Union have finalised a long-awaited trade agreement. Limanseto, spokesperson for Indonesia's Ministry of Economic Affairs, stated that this economic cooperation pact will be signed during EU Commissioner for Trade and Economic Security Šefčovič's visit to Indonesia.

Under the agreement, 80% of Indonesian goods exported to the EU will receive zero-tariff treatment. This will eliminate tariffs on labour-intensive sectors including footwear, textiles, apparel, palm oil, fisheries, renewable energy and electric vehicles. The pact is projected to double bilateral trade within five years, paving the way for broader market access for Indonesian businesses in the EU.

Currently, Thailand, the Philippines and Malaysia are also engaged in trade negotiations with the EU. Following this news, the Jakarta Composite Index rose by 0.5% during Tuesday's early trading session, while the Indonesian rupiah weakened slightly against the US dollar. 

The Indonesian rupiah has faced sustained pressure recently, with the exchange rate against the US dollar falling to the 16,600 mark on the 22nd, marking its lowest level since 30th April this year. According to Google Finance and Refinitiv data, the rupiah closed 0.09% lower at 16,600 per US dollar, having earlier dipped to 16,635 during trading – a relatively high range in recent years.

The US Federal Reserve announced a 25-basis-point interest rate cut on the 17th local time (18th Indonesian time). The previous day, Bank Indonesia had pre-emptively lowered its benchmark rate by 25 basis points to 4.75% to counter external pressures.

However, the rupiah has weakened for three consecutive trading days since the 18th. Bank Indonesia Governor Perry Warjiyo stated on the 22nd that the recent depreciation of the rupiah has been influenced by both global and domestic pressures. He noted that while the US has lowered its federal funds rate and the US dollar index shows a weakening trend, capital inflows into emerging markets, including Indonesia, remain limited.

Nevertheless, Perry remains confident in the rupiah's future prospects. He emphasised that the currency is poised to maintain stability and gradually strengthen, owing not only to Bank Indonesia's steadfast commitment to exchange rate stability but also to the nation's attractive investment returns, moderate inflation levels and favourable economic outlook.

The Bank of Indonesia announced on the 17th that it would reduce its benchmark interest rate by 25 basis points to 4.75%. This marks the central bank's fifth rate cut since 2025, taking the market by surprise.

As Southeast Asia's largest economy, Indonesia has cumulatively reduced its benchmark interest rate by 125 basis points this year, with this latest cut occurring less than a month after the previous adjustment. Pursuant to the Bank Indonesia Board of Governors' resolution, the deposit rate was simultaneously lowered from 4.25% to 3.75%, while the lending rate decreased from 5.75% to 5.50%.

Bank Indonesia Governor Perry Warjiyo announced the decision at a press conference that day. He stated that the move aligns with the central bank's expectation of maintaining inflation within the 2.5% ± 1% range for 2025 and 2026, and will help boost economic growth amid moderate inflation and a stable rupiah.

The US Federal Reserve is scheduled to announce its latest interest rate decision on the 17th local time (18th Indonesian time). Bank Indonesia anticipates a probability exceeding 90% that the Fed will cut rates. Perry noted that this strong expectation was also a key consideration in the central bank's decision to reduce the benchmark rate by 25 basis points.

Since the beginning of this year, Bank Indonesia has cut its benchmark interest rate four times in January, May, July and August, each reduction amounting to 25 basis points. Following this fifth rate cut, the central bank indicated it would retain scope for further reductions in the future.

Perry noted that this rate cut would be accompanied by ample liquidity and accommodative macroprudential policies to channel credit towards the real economy. He indicated that Bank Indonesia anticipates this year's economic growth to remain within the 4.6% to 5.4% range, with prospects of reaching or exceeding the midpoint.