Strengthening Incentives, BI Holds Interest Rate at 5.75 Percent

JAKARTA, KOMPAS — Bank Indonesia (BI) has decided to maintain its benchmark interest rate at 5.75 percent. Rather than preserving stability through the policy rate, BI has chosen to strengthen incentives to boost foreign capital inflows. The decision was taken after BI held its monthly board of governors meeting on 21-22 July 2026. In line with the benchmark rate, BI also maintained the deposit facility and lending facility rates at 25 basis points each, at 4.75 percent and 6.5 percent respectively. BI Governor Perry Warjiyo stated that global uncertainty has increased again due to the escalating intensity of the war between the United States and Iran in early July 2026. This has resulted in a shift of capital flows from developing countries to US financial markets. “The renewed increase in global economic and financial market uncertainty necessitates a strengthening of fiscal and monetary policy responses and synergy to bolster external resilience, maintain stability, and encourage domestic economic growth,” he said in an online press conference on Wednesday (22/7/2026). Consequently, BI is expanding its incentive policies and a number of other measures to increase foreign portfolio investment inflows and strengthen rupiah exchange rate stability, accelerate money market and foreign exchange market deepening, and increase liquidity and reduce liquidity segmentation in the money market and banking sector. In this regard, BI is increasing the incentive for Sell Hedge Swaps (Buy Hedge Swaps to BI) from 10 percent to 12.5 percent. This incentive expansion is also provided for Domestic Non-Deliverable Forward (DNDF) Sell Hedge transactions at 15 percent. Furthermore, incentives are also directed at increasing local currency transactions with partner countries, through an additional Buy Hedge Swap premium and a reduction in the DNDF Sell Hedge premium, both by 10 percent. BI noted that foreign portfolio investment inflows in the second quarter of 2026 recorded a net buy of 8.5 billion US dollars, primarily from the Government Securities market and Bank Indonesia Rupiah Securities instruments. This inflow of foreign portfolio investment continued into the third quarter of 2026 (up to 20 July 2026), particularly from government bonds which recorded a net buy of 0.1 billion US dollars. As a result, the rupiah exchange rate tended to strengthen by around 1.06 percent over the past week to 17,885 rupiah per US dollar on 21 July 2026. This strengthening occurred after the rupiah had weakened since late June 2026 due to the renewed Middle East conflict and rising market expectations of a US interest rate hike. Perry explained that the decision to maintain the benchmark interest rate and expand incentive policies is an integrated part of BI’s policy mix, which remains consistent in further strengthening rupiah exchange rate stability amid persistently high global uncertainty. In addition, monetary policy continues to be directed towards maintaining stability to keep inflation anchored within the government’s target range of 1.5-2.5 percent for 2026 and 2027. “Meanwhile, macroprudential policy and payment system policy continue to be directed towards supporting growth,” he said. Previously, Teuku Riefky, an economist and researcher at the Institute for Economic and Social Research at the University of Indonesia’s Faculty of Economics and Business, argued that BI should maintain its benchmark interest rate while evaluating the impact of the latest tightening policies on the exchange rate, inflation, and domestic economic activity. “Further monetary tightening may only provide limited additional support for the rupiah, while imposing greater costs on domestic credit, investment, and economic activity,” he said. Since May 2026, BI has raised its policy rate cumulatively by 100 basis points to 5.75 percent. This policy was aimed at strengthening rupiah stability and increasing the attractiveness of rupiah-denominated financial assets amid rising global uncertainty. However, the rupiah has still tended to weaken despite higher interest rates and foreign exchange intervention. According to Riefky, this indicates that monetary measures have contained volatility but have not reversed the underlying pressures. “Demand for US dollars from global investors, corporate foreign exchange needs, and concerns regarding fiscal commitment and financing needs have partially offset the benefits of a wider interest rate differential,” he said. On the other hand, inflation is expected 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. However, he continued, these inflationary pressures are largely supply-side driven, and therefore such risks are unlikely to be effectively addressed solely through additional monetary tightening.