Economist: Market Needs Clear Signal on End of Monetary Tightening Cycle
When the market understands the direction of Bank Indonesia’s future policy, the adjustment process in the money market, bond market, and banking sector will take place more quickly and efficiently.
Trimegah Sekuritas Indonesia Chief Economist Fakhrul Fulvian noted that the market currently needs a clear signal, or expectation guidance, regarding the end of the monetary tightening cycle from Bank Indonesia (BI) to support liquidity expectations.
As long as the market has not obtained certainty regarding the end of the tightening cycle, he views that the transmission of monetary policy will continue into the banking sector through increases in deposit rates and funding costs. This condition has the potential to maintain liquidity pressure longer than is actually necessary.
“By providing guidance that the July increase is the final part or near the end of the tightening cycle, market expectations will become more neutral. This will help limit the transmission of interest rate increases to bank funding costs and accelerate the formation of expectations that liquidity conditions will begin to improve in the coming months,” Fakhrul said in a statement in Jakarta on Monday.
Fakhrul assessed that this kind of communication is an important part of modern monetary policy instruments. On many occasions, market expectations have just as much influence as changes in the interest rate itself.
“Expectation guidance is now as important as the policy rate. When the market understands the direction of BI’s future policy, the adjustment process in the money market, bond market, and banking sector will take place more quickly and efficiently,” he explained.
He added that BI’s success going forward will not only be measured by its ability to maintain rupiah stability, but also by its ability to manage the transition towards a liquidity normalisation phase without causing prolonged pressure on the financial sector.
“The ultimate goal is not merely to raise interest rates. The goal is to bring the market back to a more neutral condition, maintain investor confidence, and ensure the liquidity normalisation process can take place in a measured manner without disrupting the economic recovery momentum,” Fakhrul said.
He assessed that the strengthening of Indonesia’s financial market over the past week is a positive development, although it has not eliminated the need for the central bank to raise its benchmark interest rate again at the BI Board of Governors Meeting in July.
According to Fakhrul, the improvement in sentiment was supported by increased investor confidence in Indonesia’s economic prospects, including after S&P’s decision to maintain Indonesia’s sovereign rating at investment grade BBB with a stable outlook.
However, he said, short-term market stabilisation should not be interpreted as meaning all external challenges have been resolved.
“The market has indeed shown quite significant improvement over the past week. However, Indonesia’s need to attract foreign capital inflows this year remains very large. Therefore, this positive momentum must be strengthened through consistent and credible policies,” Fakhrul said.
He estimates that Indonesia still needs additional capital inflows of around 11 billion US dollars by the end of the year to maintain the balance of payments equilibrium and strengthen rupiah exchange rate stability.
In this context, Fakhrul assesses that BI still needs to provide attractiveness for domestic financial assets through consistent policy measures.
“In our view, Bank Indonesia still needs to continue raising interest rates by 25 basis points at the July Board of Governors Meeting. This is not solely because of current market conditions, but because BI has previously conveyed a pre-emptive approach. The central bank’s credibility is built when such communication is followed by policy implementation,” Fakhrul said.
As a note, the 50 basis point increase in the BI-Rate in May 2026 was the first adjustment after the benchmark rate had been at 4.75 percent since September 2025. However, the rupiah continued to weaken, briefly touching the level of Rp18,000 per US dollar in early June.
Through the Weekly BI Board of Governors Meeting on 9 June 2026, BI again raised the BI-Rate by 25 bps. Since that decision, the rupiah has gradually moved back below the Rp18,000 per US dollar level.
At the Monthly Board of Governors Meeting on 18 June 2026, BI also continued monetary tightening by again raising the BI-Rate by 25 bps to 5.75 percent. BI is next scheduled to hold its Monthly Board of Governors Meeting on 21-22 July 2026.
On Monday (20/7), the rupiah exchange rate based on JISDOR closed at Rp17,976 per US dollar.