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• Bank Indonesia Holds Policy Rate at 4.75%: Stability Remains the Priority

Bank Indonesia Holds Policy Rate at 4.75%: Stability Remains the Priority

Bank Indonesia (BI) has once again maintained its benchmark interest rate at 4.75%, with the Deposit Facility at 3.75% and Lending Facility at 5.50%.

This stance demonstrates that BI continues to prioritise exchange rate and inflation stability as the anchor of its policy, amid unstable global conditions and shifting US Federal Reserve policy direction.

Why Is BI Holding Rates?
1. Inflation Must Remain Within Target
BI aims to ensure inflation remains within the range of 2.5% ±1% for 2025–2026.
Whilst Indonesia's inflation is relatively low in the region, global pressures—particularly from food prices, oil, and US trade tariffs—continue to make BI cautious.

2. Rupiah Factors Remain Dominant
The rupiah continues to be sensitive to US dollar strength and changes in US Treasury yields.
With foreign exchange reserves hovering around USD 149–150 billion, exchange rate stability must still be maintained through a combination of competitive interest rates and measured intervention.

3. Policy Transmission Remains Suboptimal
Although BI has cut rates by 150 bps since 2024, new lending rates have only fallen by ~15 bps.
Consumer credit and SME lending have not yet fully responded, so BI wants to allow time for the easing already implemented to work more effectively.

Implications for Markets & Investment
BI's decision is not merely about monetary policy—it directly impacts the investment ecosystem, from bonds to mutual funds.
1. Bond Market: Stable, Without Major Rally Triggers
BI's cautious stance tends to keep State Securities (SBN) yields at current levels:
- ID10Y trading in the range of 5.9%–6.1%
- Domestic demand remains strong, particularly from banks and investment managers

For bond investors (or fixed income mutual fund holders), this environment means:
- Lower volatility,
- But significant capital gain potential only emerges if BI opens the door to further rate cuts in 2026.

2. Money Market Mutual Funds Remain Competitive
With BI holding rates steady, returns on money market instruments (deposits, short-term securities) are likely to remain at current levels.

KSEI data shows:
- Money market mutual fund assets under management continue to grow >20% YoY,
- Driven by investors seeking liquidity amid global uncertainty.

BI's rate hold keeps retail investors comfortable parking funds in these low-volatility instruments.

3. Equities: Banking & Consumer Valuations Key
BI's stable policy has a direct impact on interest rate-sensitive sectors.

Banking:
Net interest margins are likely to remain protected as there is no pressure for rate increases.
However, credit growth may not accelerate quickly due to weak transmission.

Consumer:
Stable rates provide neutral sentiment, but purchasing power recovery is more dependent on fiscal stimulus and labour market conditions.

For equity mutual fund investors, this means:
- Market performance is more dependent on domestic catalysts (government spending, consumption, stimulus)
- Rather than BI monetary policy changes alone

4. Foreign Investor Sentiment: Stability More Important than Easing
BI's stability-first approach typically sends a positive signal to foreign investors, particularly those entering SBN.
Data shows:
- Inflows have returned to SBN after yields reached 6%
- Flows to equities remain selective

BI's commitment to exchange rate stability tends to:
- Reduce investment risk in Indonesia,
- Keep rupiah volatility low,
- And gradually improve foreign investor interest.