BI Rate Rises 100 Basis Points in a Month, Will It Increase Further?
Bank Indonesia (BI) has raised its benchmark interest rate, or BI Rate, by a total of 100 basis points (bps) throughout 2026. This move was taken to maintain the stability of the rupiah exchange rate amidst high global uncertainty.
The BI Board of Governors raised the rate by 50 bps in May. Subsequently, in an early June weekly meeting, BI again raised the benchmark rate by 25 bps to 5.50%. During the Board of Governors meeting on 17-18 June 2026, BI further increased the BI Rate by 25 bps to 5.75%. With this increase, the total benchmark rate hike for the year has reached 100 bps.
Bank Mandiri economist Faisal Rahman stated that the decision to raise the BI Rate by another 25 bps to 5.75% at the 26 June meeting, following a surprising 25 bps increase earlier in the same month, was not entirely unexpected. Bank Mandiri had previously seen room for further policy rate hikes during the remainder of 2026, although the latest increase occurred earlier than anticipated, as Mandiri had only expected an additional hike at the start of the third quarter of 2026.
“In our view, this rate hike reflects a pre-emptive move aimed at mitigating the risk of rising risk premiums on Indonesian financial assets amid heightened global and domestic uncertainty, particularly following the Fed’s more hawkish-than-expected stance at the 26 June FOMC meeting,” Faisal said.
From a macroeconomic fundamentals perspective, Indonesia’s economy remains relatively resilient. However, Faisal assesses that domestic vulnerabilities also remain high, especially due to the potential lagged impact of higher global energy prices and rupiah depreciation on Indonesia’s inflation outlook, fiscal position, and external balance. “These factors could increase imported inflation pressures through higher input costs and contribute to a widening twin deficit,” he explained.
On the fiscal side, weaker-than-expected government revenues could limit fiscal flexibility at a time when debt repayment obligations and energy subsidy spending are rising, particularly if the government continues to pursue an expansive growth agenda. Meanwhile, the external sector is likely to face increasing pressure from higher imports, especially for energy and intermediate goods, while exports may remain sluggish amid a global economic slowdown and persistent uncertainty. As a result, the current account deficit could widen further, adding pressure on the rupiah.
“These challenges have contributed to higher risk premiums on Indonesian financial assets and sustained depreciation pressure on the rupiah,” he added. Furthermore, investor sentiment may remain cautious ahead of key events, including the upcoming MSCI market classification review and S&P’s sovereign rating assessment for Indonesia in June and July 2026.
Thus, he sees that the future trajectory of the BI Rate will largely depend on how global and domestic uncertainties evolve. “A prolonged period of uncertainty could lead to higher risk premiums on Indonesian financial assets, potentially prompting BI to maintain a tighter monetary policy stance, indicating further rate hikes,” he said. Conversely, Faisal assesses that if external and domestic risks gradually subside and financial market conditions stabilise, the need for further policy tightening could diminish, allowing BI greater flexibility in adjusting its policy response in line with fundamental economic developments.
“As we expect these pressures to gradually ease in the second half of 2026, for now we maintain our baseline forecast that the BI Rate will remain at 5.75% for the remainder of 2026,” he stressed. However, if external and domestic pressures persist or intensify, Faisal sees the possibility for BI to implement further policy rate hikes to safeguard macroeconomic and financial market stability.