Zero tariffs
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After years of negotiations, Indonesia and the EU have finalized a highly anticipated trade agreement.
Indonesian Ministry of Economic Affairs spokesman Limanseto said the economic cooperation agreement will be signed during the visit of EU Trade and Economic Security Commissioner Sevchovich.
Under the agreement, Indonesia exports to the EU80%Products will enjoy zero tariff treatment. This will exempt tariffs from labor-intensive industries such as footwear, textiles, clothing, palm oil, fisheries, renewable energy and electric vehicles.
The agreement is expected to double the trade volume between the two sides within five years, paving the way for Indonesian companies to enter the EU market more widely.
Currently, Thailand, the Philippines and Malaysia are also in trade negotiations with the EU. Affected by this news, the Indonesian Jakarta Composite Index rose 0.5% in early Tuesday, and the Indonesian rupee weakened slightly against the US dollar.
Indonesia's local currency has been under pressure recently. On the 22nd, the Indonesian rupiah exchange rate against the US dollar fell to the 16,600 mark, the lowest level since April 30 this year.
According to Google Finance and Refinitiv data, the Indonesian rupiah fell 0.09% to close on the day, closing at 16,600 rupiah/USD, and once declining to 16,635 rupiah/USD during the session, which is also a relatively high range in recent years.
The Federal Reserve announced a 25 basis point interest rate cut on the 17th local time (18th Indonesia time). The day before, the Indonesian central bank took the lead in announcing a 25 basis point cut to 4.75% in response to external pressure.
However, since the 18th, the Indonesian rupiah has weakened for three consecutive trading days.
Indonesian Central Bank Governor Perry Vajiyo said on the 22nd that the recent depreciation of the Indonesian rupiah has been affected by double pressure from both global and domestic pressures. He pointed out that the United States has lowered the federal funds rate. Although the US dollar index is showing a weakening trend, capital flowing into emerging markets, including Indonesia, is still limited.
Despite this, Perry remains confident in the Indonesian rupiah's future. He stressed that the Indonesian rupiah is expected to remain stable and gradually strengthen, which is not only due to the Indonesian central bank's firm commitment to maintaining exchange rate stability, but also closely related to the country's high return on investment, moderate inflation levels and good economic prospects.
The Indonesian Central Bank announced on the 17th that it would lower the benchmark interest rate by 25 basis points to 4.75%. This is the fifth time the bank has cut interest rates since 2025, which is beyond market expectations.
As the largest economy in Southeast Asia, Indonesia has cut its benchmark interest rate by 125 basis points this year, and this rate cut is less than a month away from the last adjustment. According to the resolution of the Indonesian Central Bank Council, the deposit interest rate was simultaneously lowered from 4.25% to 3.75%, and the loan interest rate was reduced from 5.75% to 5.50%.
Indonesian Central Bank Governor Perry Vagio announced the news at a press conference on the same day. He said that the move is in line with the central bank's expectations that inflation will remain in the 2.5%±1% range in 2025 and 2026, and will help boost economic growth amid a moderate inflation and a stable Indonesian rupiah.
The Federal Reserve will announce the latest interest rate resolution on the 17th local time (Indonesia time 18th). The Indonesian central bank expects that the probability of the Federal Reserve cutting interest rates is more than 90%. Perry said this strong expectation is also one of the important considerations for the Indonesian central bank to decide to lower the benchmark interest rate by 25 basis points.
Since the beginning of this year, the Indonesian Central Bank has lowered its benchmark interest rate four times in January, May, July and August, with an amplitude of 25 basis points each time. After the fifth rate cut, the Indonesian central bank still stated that it will retain room for further rate cuts in the future.
Perry pointed out that the interest rate cut will be coordinated with sufficient liquidity and loose macro-prudential policies to promote credit flow to the real economy. He said the Indonesian central bank expects economic growth to remain in the range of 4.6% to 5.4% this year and is expected to reach or exceed the median level.
