DBS Group Research economist Radhika Rao notes that Bank Indonesia (BI) surprised markets by raising its benchmark rate 50bp to 5.25%, prioritising 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 hikes if weakness persists.

Front-loaded BI hike to support IDR

"Bank Indonesia increased the benchmark rate by a more-than-expected 50bp to 5.25% vs our forecast for a 25bp hike."

"The post-policy statement noted that 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 maintain inflation within the 1.5–3.5% target range."

"Growth assumptions were optimistic with 2026 GDP projected at 4.9-5.7% (DBSf: 5.1%), with the government estimating next year at a firmer 5.8-6.5%. "

"While current inflation prints are benign, price pressures could build in second half of the year if the West Asia crisis proves to be enduring."

"Overall, rupiah weakness despite sustained intervention, declining foreign reserve levels, and the widening spread versus SRBIs had set the stage for a tighter policy bias."

"We see room for 50bp more hikes in second half of the year to 5.75%, assuming further rupiah slippage, and prolonged geopolitical tensions."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)