Indonesian Rupiah: Stability-focused BI stance – UOB

UOB economist Enrico Tanuwidjaja notes that Bank Indonesia (BI) kept the BI Rate at 5.75% in August, prioritizing Rupiah and macro-financial stability over growth. Tanuwidjaja highlights BI’s focus on external risk management, use of liquidity and macroprudential tools to support domestic conditions, and a still-tight monetary stance as global uncertainty and capital flow volatility persist.

BI prioritizes Rupiah and stability

"In her maiden lead, the Acting Governor Damayanti stated that preserving rupiah stability amid heightened global financial market volatility is the key focus, while keeping inflation within BI's target range of 2.5% ±1% in 2026-2027. The overall policy mix is designed to support sustainable economic growth."

"Today’s decision was widely expected by markets and unanimous among economists surveyed prior to the meeting and importantly, BI's communication suggests that the central bank remains primarily focused on IDR stability and external risk management rather than near-term growth support. The policy statement repeatedly referenced elevated global uncertainty and continued volatility linked to geopolitical tensions in the Middle East."

"In our view, today's decision reinforces the message that BI is prepared to keep monetary conditions relatively tight until there is an improvement in the global risk sentiment, thereby moderating capital flow volatility and stabilising the rupiah."

"Given risks to rupiah’s trajectory amid still-rising external uncertainty and volatility and meaningful risks from higher energy prices, we still hold to our view for now that it is still a rate pause rather than the end of the current hiking cycle. However, given the relative stability of the rupiah in recent weeks, we scale back our forecast to just two additional 25bps rate hikes in 4Q26 to anchor rupiah’s stability and inflation expectations. This will bring the policy rate to a terminal level of 6.25% by end-2026."

"Aug’s MPC decision signals that BI remains firmly focused on defending macro-financial stability. The policy bias remains one of caution, with currency stability continuing to take precedence over growth support in the current global environment."

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