Key Points
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Bank Indonesia (BI) kept its policy rate unchanged at 4.75%, in line with market expectations, as part of its effort to safeguard rupiah stability. The overnight deposit facility rate was maintained at 3.75%, and the lending facility rate at 5.50%. Despite holding rates, BI reiterated its easing bias, signalling that it continues to assess room for further cuts while balancing currency stability and growth support.
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BI emphasized the need to accelerate policy transmission, urging banks to lower lending rates further amid weak credit demand. November loan growth improved to 7.74%yoy from 7.4% in October but remains below BI’s 8%-11% target for 2025. The central bank reaffirmed its commitment to supporting growth, projecting 2026 GDP at 4.9%-5.7% and maintaining its 2025 outlook at 4.7%-5.5%. BI expects inflation to stay within the 1.5%-3.5% target range next year.
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In a recent speech, BI Governor Perry Warjiyo reiterated the central bank’s focus on accelerating growth in synergy with fiscal policy, while prioritizing inflation control and rupiah stability. This likely underscores a measured pace of easing path. We now expect 50bps of cumulative rate cuts in 2026, bringing the policy rate down to 4.25%, contingent on inflation staying within target and global volatility remaining manageable.
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Indonesia’s economy is poised for around 5% growth in 2026, supported by BI’s rate cuts and higher government spending. High-frequency indicators point to improving momentum: consumer confidence hit a nine-month high in October; consumer goods imports averaged US$1.9bn over three months to October, the second highest in nine months; manufacturing PMI rose to 53.3 in November from 51.2 in October; and capital goods imports surged 14.9%yoy in October on a three-month cumulative basis.
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Indonesia’s headline inflation moderated to 2.72%yoy in November from 2.86% in October, driven by softer food inflation (5.48% vs. 6.59%) offsetting a slight uptick in administered prices (1.58% vs. 1.45%). Core inflation held steady at 2.36%yoy, reinforcing BI’s confidence in its inflation target.
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Despite the rate hold, the rupiah faces headwinds from fiscal risks and narrow yield spreads versus the US. We expect USDIDR to trade in the 16,700-17,000 range in 2026. While the government targets a 2.68% fiscal deficit for 2026, we anticipate a wider deficit of around 2.9% of GDP. Investor sentiment has weakened, with foreign holdings of SRBI falling to IDR86.6tn in November from IDR224.2tn in Dec 2024. Portfolio investment posted a USD7.1bn deficit in Q3, following USD8.1bn deficit in Q2, underscoring persistent external pressures.
