Key Points
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Bank Indonesia (BI) left its policy rate unchanged at 4.75%, in line with our and market expectations. BI simultaneously maintained the deposit facility rate at 3.75% and the lending facility rate at 5.50%, reiterating that the policy decision is consistent with its inflation and growth objectives, and above all, its focus on stabilising the rupiah. The rate hold came after the rupiah hit fresh record lows against the US dollar earlier in the week.
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Rupiah stabilisation is the immediate priority for BI. The central bank communicated a strong commitment to FX stability, signalling that it has boosted rupiah stabilisation efforts, including FX intervention, while seeing the rupiah stabilising with a tendency to strengthen. That said, it has also acknowledged that foreign capital outflows amid heightened global uncertainties have contributed to the recent rupiah weakness. BI’s messaging appears to be aimed at calming markets, alongside the central bank’s market intervention.
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BI’s rate hold and recent messaging will likely help slow the pace of rupiah depreciation and temper volatility, but this may not decisively reverse the currency’s weakness amid heightened market concerns about Indonesia’s fiscal trajectory and perceptions of BI’s independence.
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Indonesia’s fiscal deficit widened to 2.9% of GDP in 2025, nearing the 3% deficit cap, given weak tax collections and rising interest debt burden (~25% of central government expenditure in H125) that constrain fiscal flexibility (see IndonesiaPulse: Growth resilient, but fiscal risks weigh on rupiah). In addition, President Prabowo’s nomination of his nephew, Thomas Djiwandono - currently Deputy Finance Minister - as BI Deputy Governor to replace Juda Agung has added to these concerns. The ongoing burden‑sharing arrangement between BI and the Ministry of Finance to support government spending has also reinforced questions over BI’s operational autonomy. Rupiah stability remains vulnerable to external risks as well, including elevated geopolitical tensions and uncertainty around global tariff policies.
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Policy easing bias remains, but rupiah stability and policy transmission are constraints. Despite its emphasis on rupiah stability, BI has reiterated that it continues to assess room for further policy easing. But with BI clearly signalling a stronger focus on rupiah stabilization and improving policy transmission, we expect persistent market intervention, while rate cuts will proceed gradually and only once the rupiah stabilizes and policy transmission improves. The policy easing bias remain intact, suggesting that the policy stance is likely not shifting to tightening. We expect another 50bps rate cut to 4.25% in 2026, possibly one in March and another in Q2, aligning with our estimate of a neutral BI policy stance, as policymakers remain dovish. Bank Indonesia expects GDP growth of 4.9%-5.7% in 2026 and inflation to remain within the 1.5%-3.5% target range.
