Key Points
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Bank Indonesia kept its policy rate unchanged at 4.75% in the latest meeting, a decision that was widely expected by both the market and us. Prior to the policy rate announcement, market pricing suggested slightly less than a 50% probability of a cut, reflecting the cautious stance that Governor Warjiyo has recently conveyed. He has said that any future monetary easing will depend on the stability of the rupiah and the effectiveness of monetary policy transmission. Notably, bank lending rates have failed to track reductions in the policy rate.
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The policy tone remains cautious, with BI stating that global financial market uncertainty is rising again. Nevertheless, policymakers appear biased toward further easing, citing the need to support the domestic economy and improve the transmission of policy to lending rates. We estimate the neutral BI rate at 4.5% and continue to expect a shift toward an accommodative policy stance, with one rate cut in December and two more in H1 2026 bringing the policy rate down to 4%. This trajectory is likely to align more closely with President Prabowo’s agenda to accelerate growth and implement his social welfare programme. BI sees growth picking up in Q4 on rate cuts and stimulus, while suggesting that growth will be higher in 2026. However, the trade-offs are clear: higher inflation, fiscal slippage, and rupiah weakness are key risks to monitor.
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We expect Indonesia’s economic growth to remain stable at around 5% in 2025 and 2026, supported by looser macro policies. Our outlook is somewhat less optimistic than BI’s, particularly for 2026, given the slowdown in credit growth. Several liquidity measures have been introduced to lower lending rates and arrest the credit slowdown. Meanwhile, we think inflation risks are skewed higher. Food inflation picked up to 6.6%yoy in October, core inflation edged higher to 2.4%yoy, though administered prices remained contained.
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On the currency front, we maintain a bias toward rupiah weakness, though the BI rate hold today has temporarily helped to stabilise the rupiah. We forecast USDIDR to rise to 16,900 by end-2025 before easing slightly to around 16,700 by end-2026. The Indonesia-US 10-year yield spread remains near record lows at around 2%, leaving the rupiah vulnerable to external shocks. Rising volatility in US equities and bond markets could further pressure the currency. Fiscal risks also loom, with government plans to review the 3% budget deficit cap in 2026 potentially weighing on sovereign bonds. Foreign investors have already turned net sellers of Indonesian government bonds in November, and we expect the 10-year government bond yield to rise to 6.4% by end-2026 from 6.14% currently.
