Prepare for Bank Indonesia to Tighten Policy! Rupiah Under Pressure and Prices Surging
Economists in Indonesia anticipate that Bank Indonesia (BI) will maintain a tight or hawkish monetary policy in response to the continuous weakening of the Rupiah against the US Dollar, alongside increasing inflationary pressures. This outlook was presented by BCA’s Head of Banking Research and Analytics, Victor George Petrus Matindas, and BCA Economist Samuel Theophilus Artha in their monthly report titled ‘CPI: Slowly creeping up’.
They noted that inflationary pressures in May 2026 showed signs of a potential sustained rise in Indonesian prices, with annual inflation reaching 3.08% (YoY) and monthly inflation at 0.28% (MoM), up from 2.42% YoY and 0.13% MoM in April. ‘This increasingly real inflation threat will likely force Bank Indonesia to maintain a hawkish monetary policy stance for some time,’ stated the BCA Economic and Industry Research team.
The BCA economist team suggested that the relatively high monthly inflation reflects the impact of energy shocks. Among the three main inflation groups, administered prices recorded the sharpest increase of 0.52% MoM, driven by rising aviation tariffs and non-subsidised energy prices. Additionally, surges in certain food prices contributed to the trend, though these components often experience high volatility.
‘While the transport sector only provides a limited direct contribution to the CPI (with a weight of approximately 11.9%), its indirect contribution through the logistics sector is much larger, given Indonesia is an archipelagic nation. Therefore, the overall impact of rising energy prices is reflected not only in transport tariffs but also in the rising prices of goods and services in general,’ the BCA team explained.
Furthermore, the sharp depreciation of the Rupiah—which has weakened by approximately 6.5% year-to-date—could further increase production input costs, potentially forcing producers to raise selling prices to maintain margins. Currently, the Rupiah has weakened against the US Dollar to a new psychological level. According to Refinitiv data, the Rupiah fell 0.39% to Rp17,900/US.Thisrepresentsanewall − timelow, withthecurrencynowapproachingthenextpsychologicalthresholdofRp18, 000/US.
Consequently, analysts believe Bank Indonesia is becoming more aggressive in defending the Rupiah, as reflected in the 12-month SRBI yield reaching 6.92% in the latest auction. With the current BI-Rate at 5.25%, BCA economists believe BI still has room to raise interest rates further without significantly disrupting market liquidity, projecting an additional 50 basis point (0.50%) increase throughout 2026.
A similar sentiment was shared by Bank Permata’s economic team. Faisal Rachman, Head of Macroeconomics & Market Research at Permata Bank, noted the potential for another BI-Rate hike this year due to inflation and exchange rate pressures. However, the baseline scenario suggests BI may maintain the rate at 5.25%, viewing previous 50 basis point hikes as anticipatory measures to ensure macroeconomic stability. ‘Assuming the government maintains subsidised fuel prices at current levels, annual inflation is expected to reach around 2.72% by the end of 2026. However, if the aforementioned risks materialise and conditions worsen, inflation could rise more sharply, increasing the likelihood and justification for Bank Indonesia to raise its benchmark interest rate again,’ Rachman concluded.