Indonesia's Money Market in Turmoil, LPEM Advises BI to Proceed with Caution

Jakarta, CNBC Indonesia - The Lembaga Penyelidikan Ekonomi dan Masyarakat (LPEM) at the Faculty of Economics and Business, University of Indonesia, advises Bank Indonesia to maintain its interest rate at 4.75%. This recommendation considers inflation above target and the rupiah’s pressure from the conflict between Iran and the United States (US). “LPEM FEB UI recommends that Bank Indonesia hold the interest rate at 4.75%. The consideration is inseparable from inflation conditions above target but still facing complex pressures. The reduced effect of electricity tariff discounts has contained inflation, but upside risks remain, particularly from demand surges during Ramadan and Eid al-Fitr, as well as global energy price increases,” quoting the official LPEM FEB UI article on Friday (17/4/2026). “At the same time, the US-Iran conflict is pressuring the rupiah. This weakening stems from a combination of global factors and domestic vulnerabilities,” it continued. LPEM FEB UI also outlines that a BI interest rate cut at this time carries three main risks. First, it narrows the interest rate differential with foreign countries. Second, it adds pressure on the rupiah, and finally, it fuels inflation through rises in import and energy prices. LPEM FEB UI also highlights the Indonesian financial sector’s volatility over the past month, which factors into the recommendation to hold the interest rate trajectory. It began with MSCI, the main global investor benchmark, signalling negativity first, followed by Moody’s, the global credit rating agency, downgrading Indonesia’s outlook from stable to negative. “This is where the market starts to doubt,” added LPEM FEB UI. Fortunately, the government responded quickly by reshuffling the Board of Commissioners of the Financial Services Authority (DK OJK) and issuing rules on stock free float transparency. Governance improvement efforts are beginning to show. However, LPEM FEB UI assesses that confidence has not yet recovered. Pressure deepened further as on 4 March 2026, Fitch Ratings also downgraded Indonesia’s outlook to negative. The reason is policy direction uncertainty, fiscal pressures amid unstable global conditions. Not long after, oil prices surged to US$99 per barrel due to the US-Iran conflict. “This figure far exceeds the 2026 state budget assumption of US$70 per barrel. Consequently, concerns arise over the government’s ability to keep the deficit below the 3% limit,” said LPEM FEB UI. Then, the government responded with a press conference on 13 March 2026, where Coordinating Minister for the Economy Airlangga Hartarto outlined three deficit scenarios from 3.18% in the optimistic scenario to 4.06% in the worst-case scenario, depending on oil price conflicts and exchange rates. A day later, President Prabowo took a different stance. In a cabinet meeting, he stated he would not widen the deficit, focusing on savings and balancing the budget within 2-3 years. “This difference in statements instead sends a negative signal. The government is seen as moving away from the fiscal prudence principle built and maintained since the reform era,” said LPEM FEB UI. Pressure then spread to the financial markets. LPEM FEB UI recorded net bond outflows of US$0.77 billion since 28 February 2026. Meanwhile, the stock market saw a thin inflow of US$0.03 billion due to energy sector shifts. Overall, US$0.63 billion in capital outflows over 30 days and US$0.75 billion in capital outflows since the Iran-US conflict began. On the other hand, the yield on one-year SBN rose 83 basis points to 5.65%, and for the 10-year tenor, it increased 36 basis points to 3 basis points. “Risk premiums are rising broadly. The market is starting to price in higher economic uncertainty,” concluded LPEM FEB UI. The rupiah exchange rate also felt the impact. The rupiah is approaching its weakest point and has fallen around 3.64% year-on-year (yoy). At the same time, external buffers are eroding. Foreign exchange reserves in February 2026 fell by US$2.7 billion, from US$154.6 billion to US$151.9 billion. “This is the largest monthly decline since April 2025. The drop reflects a combination of rupiah stabilisation efforts, but also government foreign debt payment obligations.”