Key Points
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Bank Indonesia (BI) kept its policy rate unchanged at 4.75%, in line with both our and market expectations. The central bank continues to prioritise price stability, with an immediate focus on ensuring rupiah stability and strengthening domestic buffers amid elevated external volatility. The rupiah has underperformed regional peers year to date, while headline inflation also rose to 3.55%yoy in January, edging above BI’s official 1.5%–3.5% target range. The overshoot was largely driven by low base effects, resulting from the impact of electricity discounts provided by the government for residential customers a year ago. Core inflation, however, was still relatively contained at 2.5%yoy, sitting at the midpoint of BI’s target range.
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Despite this near‑term cautious stance, BI retains a dovish bias. The central bank continues to signal openness to further easing when conditions permit, as it seeks to support credit growth. Policy settings remain mildly restrictive by our estimates, while lending to micro, small and medium enterprises has contracted. With the Fed expected to further cut rates this year, we still see scope for BI to resume easing. We continue to forecast two 25bp BI rate cuts in 2026, which would bring policy closer to neutral, although we have pushed back the timing of the next cut to Q2 from March in our previous outlook. Any further policy easing is likely to be gradual and carefully calibrated, balancing support for credit growth against the risk of adding more downward pressure on the rupiah.
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BI maintains its 2026 growth forecast at 4.9%–5.7% and continues to expect inflation to remain within its 1.5%–3.5% target range this year. However, inflation risks are skewed to the upside if policymakers allow the economy to run hotter and the output gap narrows further. Higher inflation would be a drag on the rupiah.
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We expect the rupiah to remain under pressure in H1 2026 amid diminishing support from foreign portfolio inflows. This follows MSCI’s warning over market transparency in Indonesian equities and Moody’s assignment of a negative outlook on Indonesia’s sovereign credit rating. Foreign ownership of Indonesian government bonds has fallen below 14%, the lowest level in years. At the margin, demand at recent bond auctions has also weakened: the 18 February auction recorded the lowest bid‑to‑cover ratio since March 2025, at just 1.71x for the 10‑year bond, well below the average levels seen in 2024-2025. The 5‑year tenor similarly saw a soft outcome, with a bid‑to‑cover ratio of 1.47x, the lowest since May 2024. Our model suggests that 10‑year government bonds appear overvalued relative to macro fundamentals, while the technical picture points to further upside in bond yields, reinforcing near‑term headwinds for the rupiah.
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There has been a net increase in SRBI outstanding since November 2025, while SRBI yields have also risen by around 11-14bp since September last year. This has likely underpinned a modest pickup in non-resident inflows to SRBI since December. At the margin, these inflows could provide a modest offset to foreign outflows from equities and government bonds.
