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

The economics team at PT Bank Danamon Indonesia Tbk projects the BI-Rate will reach 6.25 per cent by the end of 2026, amid risks of pressure on the rupiah exchange rate, imported inflation and tightening global financial conditions.

“We are maintaining our projection for the BI-Rate at the end of 2026 at 6.25 per cent,” said Irman Faiz, Lead Economist at Bank Danamon Indonesia, in the Indonesia Macro Glint review received in Jakarta on Wednesday.

Irman said a further rate increase remains possible if pressure on the rupiah intensifies again, imported inflation becomes more persistent, or global financial conditions tighten further.

However, according to him, Bank Indonesia’s (BI) decision to keep the BI-Rate at 5.75 per cent in July 2026 shows that the timing of the next monetary tightening increasingly depends on data developments and external conditions.

At its Board of Governors’ Meeting on 21–22 July 2026, BI maintained the BI-Rate at 5.75 per cent, the Deposit Facility rate at 4.75 per cent, and the Lending Facility rate at 6.50 per cent.

Irman assessed the decision as holding rates with a tightening bias, or a hawkish hold, rather than a shift towards looser policy.

According to him, non-rate policy remains BI’s main line of defence in safeguarding rupiah stability.

Rather than raising rates directly, BI has opted to strengthen foreign exchange intervention, maintain the yield appeal of money market instruments, and lower hedging costs for foreign investors.

These measures are aimed at preserving inflows of foreign portfolio investment, deepening the domestic foreign exchange market, and sustaining the attractiveness of Indonesian financial assets amid rising external pressure.

BI raised the incentive for reduced transaction premiums on hedging swaps for foreign portfolio investment from 10 per cent to 12.5 per cent.

The central bank also introduced a new incentive of 15 per cent for domestic non-deliverable forward (DNDF) hedging transactions.

In addition, BI provided incentives for local currency transactions (LCT), in the form of an additional 10 per cent discount on hedging swap transactions and a 10 per cent reduction in DNDF premiums.

Irman assessed that lower hedging costs and still-attractive yields on Bank Indonesia Rupiah Securities (SRBI) could help sustain foreign investor demand for domestic financial assets.

Nevertheless, he added, this policy mix is expected only to mitigate, not fully eliminate, external pressure, particularly if global risk sentiment deteriorates or geopolitical tensions escalate.

BI also raised the maximum incentive limit for the Macroprrudential Liquidity Policy (KLM) from 5.5 per cent to 6 per cent of banking third-party funds, effective from 1 September 2026.

Under this refinement, the KLM allocation for financing disbursement to priority sectors was adjusted from a maximum of 4.5 per cent to 4 per cent of third-party funds.

Meanwhile, BI introduced a Money Market Deepening KLM, with an allocation of up to 2 per cent of third-party funds for banks that maintain an optimal share of non-repo government securities and SRBI holdings.

According to Irman, the redesigned KLM framework is expected to improve liquidity distribution, deepen the money market, and maintain banking liquidity adequacy to support credit disbursement.

He viewed the policy mix as reflecting BI’s efforts to safeguard rupiah stability while minimising the impact of monetary tightening on economic growth.

Furthermore, Irman projected the Indonesian economy to grow 5.30 per cent in 2026, with year-end inflation of 3.50 per cent and the rupiah ending the year at around Rp17,830 per US dollar.