Bank Danamon Economist Projects BI-Rate at 6.25 Percent by End of 2026

Bank Indonesia (BI) is projected to raise its benchmark BI-Rate to 6.25 percent by the end of 2026, according to PT Bank Danamon Indonesia Tbk’s lead economist Irman Faiz. The forecast reflects ongoing risks from rupiah exchange rate pressures, imported inflation, and tightening global financial conditions. BI maintained the BI-Rate at 5.75 percent during its July 2026 Board of Governors meeting, alongside holding the Deposit Facility rate at 4.75 percent and the Lending Facility rate at 6.50 percent. Faiz characterised the decision as a ‘hawkish hold’, indicating a bias towards tightening rather than a pivot to looser policy. He noted that further rate hikes remain possible if rupiah pressures intensify, imported inflation becomes more persistent, or global financial conditions tighten further. Rather than immediately raising rates, BI is relying on non-interest rate policies as its primary defence for rupiah stability. The central bank has strengthened foreign exchange intervention, maintained attractive yields on money market instruments, and lowered hedging costs for foreign investors. Specifically, BI increased the incentive for reducing swap hedging premiums on foreign portfolio investments from 10 percent to 12.5 percent and introduced a new 15 percent incentive for domestic non-deliverable forward (DNDF) hedging transactions. Additional incentives were provided for local currency transactions (LCT), including an extra 10 percent discount on swap hedging transactions and a 10 percent reduction in DNDF premiums. Faiz assessed that lower hedging costs and attractive yields on Bank Indonesia Rupiah Securities (SRBI) could help sustain foreign demand for domestic financial assets. However, he cautioned that this policy mix is expected to only mitigate, not fully eliminate, external pressures, particularly if global risk sentiment deteriorates or geopolitical tensions escalate. BI also raised the maximum incentive limit for the Macroprudential Liquidity Policy (KLM) from 5.5 percent to 6 percent of banks’ third-party funds, effective 1 September 2026. The allocation for financing priority sectors was adjusted from a maximum of 4.5 percent to 4 percent, while a new Money Market Deepening KLM was introduced with a maximum allocation of 2 percent for banks maintaining an optimal portion of non-repo government bonds and SRBI. Faiz believes the redesigned KLM framework is expected to improve liquidity distribution, deepen the money market, and maintain sufficient banking liquidity to support credit disbursement. He views the overall policy mix as reflecting BI’s efforts to safeguard rupiah stability while minimising the impact of monetary tightening on economic growth. Danamon projects Indonesia’s economy will grow by 5.30 percent in 2026, with year-end inflation at 3.50 percent and the rupiah exchange rate around Rp17,830 per US dollar.