BI holds rates as rupiah fragility keeps easing on hold
Bank Indonesia (BI) kept the policy rate unchanged at 4.75% at its 18–19 February 2026 meeting, in line with market consensus, maintaining the Deposit Facility at 3.75% and the Lending Facility at 5.50% as policy continues to prioritize rupiah stability amid elevated global financial uncertainty. We see the decision as a reaffirmation that currency stability remains the primary policy anchor, with the rupiah still underperforming most Asian and EM peers and investor sentiment weighed down by lingering risks around potential MSCI reclassification, Moody’s rating outlook, and renewed debate over loosening the 3% fiscal deficit cap. While BI reiterated that room for further easing remains conditional on inflation staying anchored within the 2.5% ±1% target range for 2026–2027, near-term policy optionality remains constrained by fragile FX dynamics and patchy foreign inflows. In our view, BI will stay in a holding pattern until external and domestic risk premia compress more decisively, with rate cuts unlikely before clearer visibility on MSCI’s May decision and broader improvements in portfolio flow momentum.

BI steps up FX defense, sees rupiah undervalued
BI reaffirmed that its policy mix remains anchored on rupiah stabilization amid elevated global market uncertainty, while selectively enhancing the transmission of earlier monetary and macroprudential easing through targeted FX interventions, calibrated SBN purchases, and pro-market liquidity operations to support portfolio inflows and money-market stability. The policy mix is also being broadened via payments-system readiness and digital finance initiatives to support activity momentum around seasonal demand and structural digital adoption. With USD/IDR trading near 16,920 ahead of the meeting and FX demand rising alongside domestic activity, BI’s assessment that the rupiah is undervalued relative to fundamentals reinforces the tactical bias toward sustained intervention and liquidity management, with policy coordination with the government and KSSK positioned as a key backstop to contain volatility and anchor confidence.

Rate transmission still lags as liquidity incentives turn more aggressive
Authorities are sharpening the incentive framework to accelerate lending rate pass through. Liquidity relief is now more tightly linked to measurable cuts in loan pricing, effectively lowering banks’ funding costs when they deliver faster repricing to borrowers. This is paired with incentives tied to incremental credit to priority sectors, shifting the policy mix from quantity driven intermediation support toward more explicit price-based transmission. Despite ample system liquidity and cumulative easing since 2025, transmission into bank funding and lending rates remains sticky. Credit growth at the start of 2026 remains resilient (+9.96% YoY) but declines in lending rates on new loans still lag cumulative BI Rate cuts, while deposit rate rigidity driven by elevated special rates for large depositors continues to slow repricing at the retail level. In our view, the increasingly technical and performance linked incentive design signals a shift from moral suasion toward quasi conditionality to force monetary easing to pass through to the real economy as the 2026 growth outlook improves.

Policy stance remains on hold amid tight easing space
We still see Bank Indonesia keeping the policy rate on hold through the first half of 2026, as near-term easing space remains constrained by FX volatility, elevated risk premia, and a delayed start to Fed easing that keeps rate differentials tight. While BI assesses the rupiah to be undervalued, recent pressures reflect heightened risk aversion and capital outflow risks rather than deteriorating fundamentals. The next potential catalyst lies in upcoming MSCI and sovereign rating reviews, supported by Indonesia’s anchored inflation and resilient growth outlook. In this context, BI is likely to continue prioritizing currency and financial stability in the near term, while still leaving room for a gradual 25 to 50 bps policy recalibration later in 2026 once external conditions and risk premia become more supportive.

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22 February 2024 - 10.06am

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