Tightening continues

Bank Indonesia (BI) extended its tightening cycle with a further 25 bps hike to 5.75% at the 17–18 June 2026 RDG, following a cumulative 75 bps increase over the past month, reinforcing a clearly front‑loaded and stability‑driven policy stance. The Deposit Facility and Lending Facility were raised in tandem to 4.75% and 6.50%, reflecting a broad tightening of the rate corridor as BI responds to persistent external pressures, including rupiah depreciation toward ~18,000, continued portfolio outflows, and elevated global risk aversion driven by geopolitical tensions and higher commodity prices.

The pace and sequencing of these hikes suggest a reactive policy posture, where BI is prioritising currency stabilisation and inflation anchoring over growth considerations, while re‑establishing interest rates as the primary signalling tool after a period dominated by FX intervention and liquidity measures. Overall, the policy shift underscores a pro‑stability bias, as shrinking trade buffers and rising imported inflation risks continue to challenge Indonesia’s external resilience..

Stability through carry, at a cost

BI is increasingly using SRBI as a core tool to anchor capital flows and support rupiah stability through high yields, with outstanding surpassing Rp1.000 tn and foreign participation rising significantly (around Rp238 tn or ~23% of total), reflecting strong carry trade demand as yields move above 7.5%. However, these inflows remain largely short-term and yield-driven, indicating more tactical positioning rather than long-term confidence.

At the same time, the banking sector’s dominance—holding nearly 70% of SRBI outstanding—suggests that domestic liquidity is increasingly parked in central bank instruments rather than flowing into productive lending, even as credit growth remains relatively strong. The tightening of FX rules, including the reduction of the non-underlying FX purchase threshold to USD10.000, further reinforces BI’s defensive stance to curb speculative demand and protect the rupiah.

BCA Research Virtue 4

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Andre Benas

Bank Tabungan Negara

18 March 2025 - 10.32am

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