Radhika Rao, economist at DBS Group Research, says Bank Indonesia (BI) surprised markets by raising its benchmark rate by 50bp to 5.25%, prioritizing macroeconomic stability and rupiah support. Rao highlights optimistic 2026 growth projections, benign current inflation but potential second-half price pressures, and expects policy guidance to support the rupiah with scope for further appreciation if weakness persists.
Front-loaded BI Hike to support IDR
“Bank Indonesia raised the benchmark rate by 50bp more than expected, to 5.25%, while our estimate was for a 25bp increase.”
“The front-loaded rate hike reflected the central bank’s emphasis on macroeconomic stability, particularly towards the currency, and its preference for pre-emptive action to keep inflation within the 1.5-3.5% target range,” the post-policy statement said.
“Growth expectations were optimistic with GDP forecast at 4.9-5.7% (DBSF: 5.1%) in 2026, with the government estimating it to be a strong 5.8-6.5% next year.”
“Although current inflation prints are benign, prices could come under pressure in the second half of the year if the West Asia crisis proves enduring.”
“Overall, rupee weakness despite continued interventions, decline in foreign reserve levels and widening spreads against SRBI have set the stage for a tighter policy bias.”
“We see scope for further upside of 50bp to 5.75% in the second half of the year given further rupee depreciation and prolonged geopolitical tensions.”
(This article was created with the help of an artificial intelligence tool and reviewed by an editor.)
