Economists: BI-Rate Should Remain at 5.75% for Prudence

Jakarta - A number of economists assess that the BI-Rate needs to be maintained at 5.75 percent in the Bank Indonesia (BI) Board of Governors Meeting this July 2026, in line with the need for caution after monetary tightening with a cumulative increase of 100 basis points since May 2026. Macro-economist at Bank Tabungan Negara (BTN) Myrdal Gunarto stated that with global investors returning to the stock and government bond markets, the rupiah exchange rate against the US dollar has fallen below Rp17,899 per US dollar, suggesting the rate should remain unchanged. He noted that Indonesia’s foreign exchange reserves increased in June compared to May 2026, signalling that the peak period of domestic foreign currency demand has passed. However, he cautioned that pressure is beginning to mount from the value of oil imports as oil prices surge again, although consumer inflation is projected to remain below 3.5 percent in July 2026. Myrdal argued that the economy requires an interest rate climate that can more aggressively drive growth, accelerating consumption, investment, and export financing.

Separately, PermataBank Chief Economist Josua Pardede said the main reason to hold the rate is that while inflation has risen, it has not breached its target. June 2026 inflation rose to 3.34 percent year-on-year from 3.08 percent in May, primarily due to cost pressures from rupiah depreciation, transportation, and imported goods prices. He warned that the increase warrants vigilance but is not yet strong enough to justify further rate hikes as long as the rupiah and inflation expectations do not deteriorate. Pardede acknowledged that the risk of further tightening remains open if the rupiah moves uncontrollably, capital outflows increase, or markets again doubt the central bank’s ability to maintain stability. He highlighted that external pressures remain significant due to a relatively strong US dollar, tight US interest rate policy, oil price sensitivity to geopolitics, and signs of weakening in Indonesia’s trade balance. Indonesia recorded a US$1.16 billion trade deficit in May, its first in over six years, as imports grew faster than exports. If BI were to raise rates again, Pardede believes the aim would be to dampen rupiah pressure and maintain capital flows rather than to control inflation, which is currently driven by cost and supply factors. He noted that portfolio flows supporting the rupiah remain fragile, with net inflows of US$5.65 billion from January to July 2026 largely supported by SRBI and bonds, while equities saw outflows and the rupiah weakened to around Rp17,895 per US dollar at the close on Friday, 17 July 2026, indicating a yield-sensitive and easily reversible flow pattern. Pardede views holding the rate not as a loss of policy space but as a form of prudence, allowing time for the 100 bps increase to transmit through money markets, bonds, the exchange rate, credit, and inflation expectations. He argued that an overly rapid additional hike could signal panic and suppress economic growth, making a hold decision with firm communication healthier than chasing short-term sentiment.

Teuku Riefky, a macroeconomics and financial market economist at LPEM FEB UI, echoed this view. He noted that foreign portfolio flows to Indonesia improved between 15 June and 15 July 2026, with net inflows reaching US$0.70 billion. However, the rupiah weakened by 2.09 percent month-to-month from Rp17,690 to Rp18,060 per US dollar over the same period, despite the increased portfolio inflows. Meanwhile, Indonesia’s foreign exchange reserves rose from US$144.9 billion in May to US$145.6 billion in June, marking the first monthly increase since January 2026. LPEM FEB UI expects inflation to remain within BI’s target range, although upside risks have increased following renewed geopolitical tensions in the Middle East, which could raise global energy prices and contribute to imported inflation. The institute assesses that further monetary tightening would likely provide only limited additional support for the rupiah while imposing greater costs on domestic credit, investment, and economic activity. LPEM FEB UI therefore expects Bank Indonesia to hold the BI-Rate at the upcoming Board of Governors meeting while evaluating the impact of recent policy tightening on the exchange rate, inflation, and domestic economic activity.