Bank Indonesia Warns of 'Higher for Longer' U.S. Interest Rate Era

Bank Indonesia (BI) forecasts a sustained period of elevated U.S. interest rates, a scenario described as the "higher for longer" era, which is expected to continue impacting global financial markets amidst ongoing economic uncertainty. BI Acting Governor Destry Damayanti highlighted that this prolonged high-rate environment will place significant pressure on the global financial sector.

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For the global economy, we will face a situation of uncertainty that may last for quite some time, meaning we are entering what is called the ‘higher for longer’ era.

The U.S. Federal Funds Rate is anticipated to remain high due to persistent inflationary pressures, rising oil prices, and the U.S. government's need to finance its budget deficit. These factors are projected to increase the supply of U.S. government bonds, consequently keeping bond yields and interest rates elevated. This situation also contributes to the expected continued strength of the U.S. dollar index (DXY) against major currencies.

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So, all of this will create a situation in which almost everything, whether it is bond yields or interest rates, will remain high in the US.

BI's assessment indicates a weak global economic outlook for 2026, with projected growth around 3.0 percent and inflation around 4.5 percent. This necessitates tighter global monetary policies, including a projected rise in the U.S. Federal Funds Rate in the fourth quarter of 2026. The persistent uncertainty in global financial markets is dampening investor appetite for emerging markets, further strengthening the U.S. dollar. Consequently, BI emphasizes the need for stronger coordination between fiscal and monetary policies to bolster Indonesia's economic resilience and stability.

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Of course, this global situation will have an impact on our economy.