Bank Indonesia Holds Rates at 5.75% Amid Rupiah and External Risks
As we expected, Bank Indonesia (BI) kept its benchmark rate unchanged at 5.75% on September 23 after hiking 50 bps both in May and June this year. We believe BI will hold the rate constant at 5.75% the rest of the year to see lagged impacts of previous hikes.
Bottom Line Up Front (BLUF): As we expected, Bank Indonesia (BI) kept its benchmark rate unchanged at 5.75% on September 23 after hiking 50 bps both in May and June this year. Despite the inflation stood at 3.2% in August still remaining within BI's target range of 1.5%–3.5%, we think the rupiah’s loss of value against the USD particularly in H2 September coupled with growing tensions in the Middle East would likely put the BI on alert. We expect BI to keep interest rates on hold at 5.75% in Q4 to monitor the lagged impacts of its previous rate hikes. Even if the Fed delivers an expected 25 bps hike, BI is unlikely to raise rates unless the rupiah experiences severe depreciation.
Figure 1: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), September 2024 – September 2026
Source: IslamicMacro
As we expected, Bank Indonesia (BI) kept its benchmark rate unchanged at 5.75% on September 23 after hiking 50 bps both in May and June this year. This marked the first meeting directed by the newly appointed governor Destry Damayanti this month. It is worth noting that the BI also left its overnight deposit and lending facility rates unchanged at 4.75% and 6.50%, respectively.
Following the release, BI’s new governor mentioned that "While stability remains our focus now, we must also open room for the economy to move faster", and added that the rate hikes in May and June were sufficient to respond to global uncertainty. Damayanti also announced bigger discounts on hedging costs for foreign investors who buy rupiah-denominated assets, in what she called innovative policy, in a bid to attract capital inflows and defend the rupiah.
It appears the ongoing U.S.–Iran conflict remains a critical driver of Indonesia's economic outlook. With the fragile truce frequently put to the test and oil prices continuing to swing, concerns are growing over the impact on Indonesia’s fiscal budget.
Despite concerns, we believe BI continues to show its determination to maintain the rupiah stability while keeping inflation within the target range and supporting GDP growth. (Note: The inflation stood at 3.2% in August and stayed within BI's target range of 1.5%–3.5%). Despite subdued inflation, we think the rupiah’s loss of value against the USD in H2 September coupled with growing tensions in the Middle East would likely put the BI on alert in the near term.
We now assess the BI to keep interest rates on hold at 5.75% in Q4 to monitor the impact of its previous rate hikes. Even if the U.S. Federal Reserve delivers an expected 25 bps hike, BI is unlikely to raise rates unless the rupiah experiences severe depreciation.
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Analyst / Author Declaration: I, Volkan Sezgin, Independent Analyst and Researcher, declare that the views and conclusions expressed in this publication reflect my professional judgment at the time of publication and are presented in good faith. The analysis has been prepared independently and without improper influence or inducement. Where applicable, material conflicts of interest are disclosed. I observe applicable professional and internal compliance standards concerning confidentiality, independence and the responsible use of information.