Indonesia: Growth and inflation outlook shapes BI path – MUFG

MUFG’s Senior Currency Analyst Lloyd Chan notes that Bank Indonesia kept its 2026 growth forecast at 4.9%–5.7% and still expects inflation to stay within its 1.5%–3.5% target. However, upside inflation risks could weigh on the Rupiah if policymakers let the economy run hotter. Higher bond yields and overvalued 10‑year bonds add to policy trade-offs for BI as it considers gradual easing.

Growth targets held as inflation risks tilt up

"BI maintains its 2026 growth forecast at 4.9%–5.7% and continues to expect inflation to remain within its 1.5%–3.5% target range this year. However, inflation risks are skewed to the upside if policymakers allow the economy to run hotter and the output gap narrows further. Higher inflation would be a drag on the rupiah."

"At the margin, demand at recent bond auctions has also weakened: the 18 February auction recorded the lowest bid‑to‑cover ratio since March 2025, at just 1.71x for the 10‑year bond, well below the average levels seen in 2024-2025. The 5‑year tenor similarly saw a soft outcome, with a bid‑to‑cover ratio of 1.47x, the lowest since May 2024."

"Our model suggests that 10‑year government bonds appear overvalued relative to macro fundamentals, while the technical picture points to further upside in bond yields, reinforcing near‑term headwinds for the rupiah."

"There has been a net increase in SRBI outstanding since November 2025, while SRBI yields have also risen by around 11-14bp since September last year. This has likely underpinned a modest pickup in non-resident inflows to SRBI since December. At the margin, these inflows could provide a modest offset to foreign outflows from equities and government bonds."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)