BI Holds Its Ground as Policy Mix Turns More Supportive

Bank Indonesia (BI) kept the BI-Rate unchanged at 5,75% at its 18–19 August 2026 RDG, with the Deposit Facility and Lending Facility maintained at 4,75% and 6,50%, respectively. The decision reflects BI’s continued prioritization of rupiah stability amid elevated global uncertainty, while domestic inflation remains well contained, with headline inflation easing to 2,88% YoY in July from 3,34% in June and core inflation at 2,76%. Against this backdrop, we see the unchanged BI-Rate as a pause that allows BI to balance exchange-rate stability with growth support. With 2Q26 GDP expanding by 5,29% YoY and global rates remaining elevated, the central bank has limited urgency to cut rates aggressively. Instead, the easing impulse is increasingly being delivered through targeted macroprudential and liquidity measures.

Liquidity and Credit Transmission Strengthen

The more accommodative side of BI’s policy mix is increasingly visible through liquidity and credit channels. Base money (M0) accelerated to 18,3% YoY in July from 14,1% in June, driven primarily by a 22,4% increase in commercial bank reserves at BI and 15,1% growth in currency in circulation, while M2 grew 8,7% YoY in June. More importantly, bank lending accelerated to 13,58% YoY in July from 12,67% in June, suggesting that additional liquidity is increasingly translating into real-sector intermediation.

This transmission is being reinforced through the KLM, which reached Rp446,5 Tn by the first week of August, with Rp368,4 Tn allocated through the financing channel, Rp73,2 Tn through the interest-rate channel, and Rp4,9 Tn through the financing-to-funding channel. BI will further introduce KLM for Money Market Deepening (KLM PPU) from September, while the maximum overall KLM incentive is being increased to 6,0% of DPK from 5,5%. In our view, this indicates that BI is pursuing a “lower-for-longer through the transmission mechanism” strategy rather than through the policy rate itself, using liquidity incentives to ease financing constraints while maintaining financial stability, supported by strong banking buffers with CAR at 23,70% and gross NPL at 2,09%.

Defending the Rupiah Through Deeper FX Markets

Rupiah stability remains the key constraint on further conventional monetary easing, particularly as BI expects global growth to remain modest at around 3,0% in 2026, global inflation around 4,5%, and US monetary conditions to remain tight. BI is therefore relying on a broader set of foreign-exchange instruments, including NDF, spot, and DNDF, alongside incentives designed to attract and retain foreign currency inflows. The rupiah strengthened to Rp17.855/USD on 18 August, up 0,78% point-to-point from end-July, while BI is expanding the underlying transactions eligible for a 12,5% premium discount on FX hedging swaps to include bank foreign borrowings and FDI.

Incentives for DNDF hedging are also set at 15%, while additional incentives are provided for Local Currency Transactions with partner countries. Indonesia’s external position also remains adequate, with USD3,58 billion cumulative trade surplus in January–June, USD1,8 billion net portfolio inflows as of 14 August, and FX reserves of USD145,3 billion, equivalent to around 5,5 months of imports. We therefore view BI’s current stance as a deliberate policy trade-off: keeping the policy rate sufficiently credible for external stability while using liquidity, macroprudential incentives, and FX-market deepening to support growth. We maintain our 2026 GDP growth forecast at 5,1–5,3%, supported by resilient domestic demand, stronger credit transmission, and continued fiscal and monetary policy coordination.

Stability allows a pause, risks still point higher

Overall, we maintain our expectation that the BI Rate could still reach 6.00% by end-2026, despite the current policy rate standing at 5.75%, as external risks remain tilted to the upside. Recent Fed minutes suggest policymakers remain concerned about inflation risks stemming from higher energy prices, leaving room for one additional 25 bps Fed hike in 2H26 as a pre-emptive step to avoid a more aggressive tightening cycle later on. At the same time, further Bank of Japan intervention to support the yen could trigger renewed U.S. Treasury selling, potentially pushing global yields higher and tightening external financial conditions.

That said, under the current environment, characterised by a more stable rupiah, moderating inflation, firmer capital flows, and easing foreign selling pressure in the bond market, Bank Indonesia can afford to be more comfortable maintaining rates at 5.75%, slightly below our previous assumption of 6.00%. As such, while our base case continues to point to a terminal BI Rate of 6.00%, the urgency for additional tightening has diminished. Any revision higher would likely require a renewed deterioration in external conditions, particularly through higher oil prices, a sharper rise in U.S. Treasury yields, or renewed pressure on the rupiah and inflation expectations.

ELSA-Plugged in for Indonesia’s Energy Play

ELSA-Plugged in for Indonesia’s Energy Play

Hernanda Cahyo

PT Elnusa Tbk

28 November 2025 - 07.32am

ELSA-Plugged in for Indonesia’s Energy Play

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