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BI Policy: BIs Odyssean Maneuver

4 MIN READ•29 Jul 2026

Bank Indonesia (BI) maintained the BI Rate at 5.75% at its Jul-26 policy meeting. This decision aligns with the relatively favorable conditions in the domestic capital market in recent days, with S&P’s unchanged rating for Indonesia and a recent rotation from global AI stocks to EMs.

Nevertheless, BI actually had ample reasons to move ahead of the curve. Geopolitical tensions remain high, thus keeping oil prices elevated. El-Niño is also a concern, and the Fed is likely to raise FFR at least one more time. Furthermore, credit growth in June sharply accelerated to 12.67% YoY (up from 11.51% YoY in May), leading to the INDONIA rate persisting at an elevated level.

So, what’s the rationale? The answer probably lies in the government’s focus for the next six months. There appear to be three priorities: the Red-White Cooperatives, the establishment of PT DSI, and PFII. Some of them will require credit support from SOE banks, and to some extent explain why credit growth in June accelerated sharply, as well as why the government's SAL must remain in SOE banks.

So here, BI is making a creative move with three objectives: increasing banks’ lending capacity, keeping the Rupiah stable, without raising interest rates. BI revised its Macroprudential Liquidity Incentive (KLM) framework by removing the interest channel, reducing the financial channel to 4.0% of total deposits, and introducing a Money Market Deepening (PPU) incentive to 2.0% of total deposits.

The new framework encourages banks with securities holdings exceeding 19% of total deposits to reallocate part of their SBN and SRBI portfolio toward lending. As a counterbalance, to absorb the SRBI and SBN sold, BI increased incentives for foreign inflows by increasing the FX Swap incentive to 12.5% and expanding the DNDF hedging incentive to 15.0%.

The direction of this policy combination, which may continue until year-end, generally shifts the cost of stability deeper into BI’s revenue, which, on one hand, carries its own risk. Meanwhile, as credit growth continues to be spurred, we may still see a pass-through of higher core inflation into increased yields. At the end, we still see a case for BI to raise interest rates again this year, with a probability of 1-2 more hikes, but this could be lower if the Fed becomes increasingly less hawkish due to US labor market conditions.

Versi lengkap report ini (dan report sebelumnya) dapat diakses lewat link berikut: https://s.id/BCA_REI

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