Bank Indonesia holds, but the hiking cycle may not be over
Per the full note from ING THINK, Bank Indonesia's decision to hold its policy rate at 5.75% is not the end of its tightening cycle—the source explicitly argues that external vulnerabilities and rising inflation pressures keep further hikes on the table. The central bank simultaneously unveiled targeted measures to support the rupiah, including lower premia on hedging swaps and domestic NDFs, signaling that currency stability remains its primary objective rather than broad-based rate increases. The desk's read is that BI prefers market-based tools to attract inflows, but the underlying current account deficit, subdued FDI, and recent moderation in foreign bond inflows mean the rupiah's stabilization is not yet durable. With no high-impact calendar events in the next 30 days for Indonesia, the near-term catalyst is the incoming inflation and trade data that will test whether BI's patience is sustainable. The alternative read—that BI is done hiking—is implicitly rejected by the desk, which warns the tightening bias is merely paused.
What the desk is arguing
Per the full note from ING THINK, Bank Indonesia has kept its policy rate unchanged at 5.75%, but the desk frames this as a pause rather than a peak. The source emphasizes that external vulnerabilities and rising inflation pressures mean the tightening cycle is not yet over, and that currency stability remains BI's primary objective.
The supporting evidence the desk leans on is twofold. First, BI announced targeted measures to support the rupiah and ensure ample domestic liquidity, including lower premia on hedging swaps and domestic NDFs—a clear signal that the central bank is willing to rely on market measures rather than rate hikes to attract inflows. Second, the source notes that while foreign investors have been net buyers of Indonesian bonds for four consecutive months, inflows have recently moderated and remain too modest to signal a decisive shift in sentiment. The current account deficit is expected to widen, and FDI inflows are still subdued, keeping depreciation risks alive.
The counterfactual the desk is implicitly rejecting is that policy continuity and improved investor sentiment—supported by the appointment of a new finance minister and a 2026 budget deficit projected to narrow to 2.85% of GDP from 2.92% in 2025—are sufficient to stabilize the rupiah without further tightening. The desk argues that a more durable recovery in portfolio inflows requires greater confidence that the rupiah has stabilized and macroeconomic risks are easing, neither of which is yet assured.
How other firms see it
So far, only ing has published a view on this development, and its stance is aligned with the desk's cautious read—ING expects the tightening bias to persist. There are no contrary firms to group at this time.
Traders should watch related indicators such as the USD/IDR pair, the JCI equity index, and Indonesia's 10-year government bond yield for confirmation of foreign flow dynamics. The trajectory of the US dollar and Federal Reserve policy will also intersect this thesis, as a softer USD would ease pressure on the rupiah and potentially delay further BI hikes.
What the calendar says
There are no high-impact events scheduled for Indonesia in the next 30 days, so the market will rely on BI's ad-hoc market operations and any unscheduled interventions to gauge the central bank's resolve. Without a near-term catalyst, positioning will likely be driven by global risk sentiment and the next monthly inflation and trade prints.
Key takeaways
- 01Bank Indonesia held rates at 5.75%, but ING argues the tightening cycle is not over due to external vulnerabilities and rising inflation.
- 02BI introduced targeted measures to support the rupiah—lower premia on hedging swaps and domestic NDFs—reinforcing currency stability as the primary objective.
- 03Foreign bond inflows have moderated after four consecutive months of net purchases, signaling fragile sentiment.
- 04The current account deficit is expected to widen and FDI remains subdued, keeping depreciation risks alive.
- 05No high-impact Indonesian events are scheduled in the next 30 days, leaving the market focused on ad-hoc BI operations and monthly data.
Market implications
Watch USD/IDR for a break above recent ranges if foreign inflows continue to moderate; a sustained move higher could force BI to hike despite its preference for market measures. The 5.75% policy rate is the key line—any surprise hike would likely strengthen the rupiah, while inaction could invite further depreciation pressure. Also monitor Indonesia's 10-year bond yield for signs of foreign investor conviction.
Risks to this view
A sharp improvement in global risk appetite or a decisive rebound in portfolio inflows could stabilize the rupiah without further tightening, invalidating the call for more hikes. Conversely, a worsening current account deficit or a spike in inflation could force BI's hand earlier than expected. An unexpected shift in Fed policy that weakens the USD would also reduce pressure on BI to tighten.
Older quick take Quick take Published 09:51 Indonesia Bank Indonesia holds, but the hiking cycle may not be over Bank Indonesia has remained on hold, but external vulnerabilities and rising inflation pressures suggest the tightening cycle is not yet over Bank Indonesia has opted to keep policy rates unchanged at 5.75% Bank Indonesia holds rates, announces measures to support rupiah Bank Indonesia kept its policy rate unchanged at 5.75%, in line with market expectations and our own. The central bank also unveiled measures to support the rupiah and ensure ample domestic liquidity, including lower premia on hedging swaps and domestic NDFs. These steps reinforce the view that currency stability remains BI's primary objective.
Rather than raising rates and increasing borrowing costs, BI appears willing to rely on targeted market measures to attract inflows and support the rupiah. Foreign investors are returning, cautiously Investor sentiment towards Indonesia has improved in recent months, supported by greater policy certainty following the appointment of the new finance minister and a renewed commitment to fiscal discipline. Policy continuity has been reinforced by keeping the 2026 budget framework largely unchanged, with the fiscal deficit projected to narrow modestly to 2.85% of GDP from 2.92% in 2025.
Improving confidence has been reflected in the bond market, where foreign investors have recorded net purchases for four consecutive months. However, inflows have recently moderated and remain too modest to signal a decisive shift in sentiment. A more durable recovery in portfolio inflows will likely require greater confidence that the rupiah has stabilised and that macroeconomic risks are continuing to ease.
Rupiah and inflation risks keep tightening on the table While investor sentiment has improved, Indonesia's external accounts remain a key source of vulnerability. FDI inflows are still subdued, while the current account deficit is expected to widen, keeping depreciation pressures on the rupiah elevated. Meanwhile, declining FX reserves and weaker reserve adequacy have reduced Bank Indonesia's scope for sustained currency intervention.
Against this backdrop, we expect BI to maintain its focus on exchange-rate stability. Although improving sentiment has eased near-term pressure on policymakers, the underlying balance of payments picture has yet to improve materially. At the same time, upside risks to inflation from higher fuel prices and a severe El Niño could add to domestic price pressures.
We therefore continue to expect one additional 25bp rate hike before year-end. Inflation Asia Markets Asia ASEAN Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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