Brace Yourselves, Indonesians: Wallets Thin as Loan Instalments Choke

A foreign bank economist estimates there is still considerable room for Bank Indonesia’s benchmark interest rate to rise until the end of the third quarter of 2026, as the potential for rupiah depreciation remains significant. Senior Economist at DBS Bank, Radhika Rao, predicts BI will raise its benchmark rate twice more, taking it to 6% by year-end. “We anticipate another 50 basis points of hikes between Q2-2026 and Q3-2026, bringing the benchmark rate to 6%,” Radhika stated. This is predicted to occur as the risk of conflict in the Middle East continues into the second half of 2026, impacting inflation and currency movements. Radhika also noted that pressure on the rupiah remains quite high as long as geopolitical tensions in the Middle East persist. “The rupiah has indeed recovered partially after the authorities took a stance to stabilise it, although the rupiah remains vulnerable to external geopolitical developments,” Radhika continued. The successive rate hikes have signalled policymakers’ preference to act proactively to stabilise markets, triggering hawkish expectations that will help slow one-sided movements in the currency. “This precedent suggests that additional policy tightening may be necessary to stabilise the rupiah,” she explained. Previously, BI raised its benchmark rate by 25 basis points to 5.50% from 5.25%. BI had also raised the benchmark rate by 25 basis points before that. Over the past month, the benchmark rate has therefore risen by 50 basis points. This hike is a follow-up measure to strengthen rupiah exchange rate stabilisation from the impact of high global turmoil due to the war in the Middle East, as well as a pre-emptive step to keep inflation within the government’s target range of 2.5%±1% for 2026 and 2027. The policy is also aimed at increasing yields to attract foreign portfolio investment inflows into Indonesia. After the benchmark rate was raised, the rupiah managed to strengthen. At yesterday’s market close, the rupiah closed 0.66% stronger at Rp18,050 per US dollar. Today, the rupiah opened at Rp17,875 per US dollar, an appreciation of 0.97%. This position brings the rupiah back below the psychological level of Rp18,000 per US dollar, after it had been consistently in the Rp18,000 per US dollar range in recent days.