Bank Indonesia (BI) is expected to take a measured approach to interest-rate cuts in 2026, analysts said, as persistent pressure on the rupiah and investor concerns over fiscal risks limit the extent the central bank can go in supporting President Prabowo Subiantos 8 per cent growth target.

Analysts noted that BIs immediate priority remains defending the Indonesian currency, even as it signals that it is open to gradual rate cuts under the right conditions.

Research firm BMI expects the central bank to keep the policy rate at 4.75 per cent in the near term, and then to ease it to 4.25 per cent by the end of 2026. The pace and scope of further cuts, however, are likely to be constrained by ongoing currency pressures.

We expect weaker export growth and domestic factors to continue putting depreciatory pressure on the rupiah, limiting space for further easing, BMI said in a recent note.

BI closed the year on a cautious note by holding its benchmark rate at 4.75 per cent at its Dec 17 meeting. The move was widely expected, and signalled that defending the rupiah had taken precedence amid global volatility and mounting domestic fiscal risks.

While the central bank maintained its easing bias, BI governor Perry Warjiyo indicated that any further rate cuts would be carefully calibrated to avoid adding pressure on the rupiah.

The rupiah had fallen more than 3.5 per cent against the US dollar as at Dec 30, making it one of the weakest currencies in emerging Asia, while foreign investors pulled a net US$119 million from Indonesian government bonds as at Dec 19.

Since launching its easing cycle in September 2024, BI has trimmed a total of 125 basis points in an effort to boost growth in South-east Asia’s largest economy.

Indonesia showed signs of a modest slowdown in the third quarter, as gross domestic product growth slowed to 5.04 per cent year on year from 5.12 per cent in Q2, weighed down by subdued household demand.

The central bank maintained its GDP expansion forecasts at 4.7 to 5.5 per cent for 2025, and 4.9 to 5.7 per cent for 2026. Juggling growth and rupiah stability

The challenge of balancing economic expansion with currency stability has grown more pronounced for BI, noted Sok Yin Yong, fixed-income analyst for Asia at Swiss private bank Julius Baer.

The rupiah remains under pressure from foreign capital outflows, driven by concerns over fiscal risks and the independence of BI, while growth momentum is slowing, she said.

This combination has weighed on foreign investor sentiment and appetite for Indonesian bonds, which could keep capital inflows subdued and continue to pressure the rupiah.

Following mass protests in August, Prabowo has doubled down on populist policies, raising investor concerns over fiscal sustainability.

Worries over fiscal discipline have also deepened after the departure of long-serving finance minister Sri Mulyani Indrawati – known for her prudent fiscal policies – from the Cabinet in September.

BMI noted that these concerns were further compounded by catastrophic floods in November, which could force the government to reallocate spending to reconstruction while staying within the fiscal deficit ceiling.

BIs independence also came under more scrutiny in 2025, amid the central banks expanded mandate and closer coordination with the Finance Ministry. Analysts caution that these developments could heighten the risk of political influence in BI’s policy decisions.

High volatility in the rupiah prompted the central bank to step in frequently in both onshore and offshore markets, with the aim of cushioning the currency against further depreciation.

The Indonesian government is also planning to tighten rules around its foreign exchange regulation, which previously required exporters of natural resources – excluding oil and gas – to retain 100 per cent of their FX earnings in a designated onshore bank account for a year.

The move is viewed as part of broader efforts to manage currency flows and strengthen the rupiah. Transmission remains weak

While some economists expect further rate cuts this year, the impact of prior policy easing has yet to fully filter through the economy.

Despite the cumulative reduction of 125 basis points in 2025, lending rates and credit growth have remained muted, as many businesses continue to take a cautious, wait-and-see approach amid economic uncertainty.

Loan growth stood at 7.9 per cent in November, below BIs 8 to 11 per cent target for 2025, highlighting the tepid response from borrowers.

Maybank economists Brian Lee and Chua Hak Bin expect a more pronounced credit upcycle to emerge in 2026, supported by the central banks measures to improve liquidity and policy transmission, alongside the governments planned 200 trillion rupiah (S$16 billion) injection.

Maybank projects that BI could cut rates by an additional 75 basis points in the new year, bringing the policy rate down to 4 per cent.

Source : businesstimes.com.sg

Jan 3th, 2026