Destry Damayanti Faces Test on Rupiah Stability as BI Governor Candidate

Destry Damayanti, a contender for the governorship of Bank Indonesia (BI), will face immediate pressure to manage the rupiah's stability. Josua Pardede, Chief Economist at Permata Bank, anticipates that Destry, currently a Senior Deputy Governor, will largely maintain existing monetary policies. The primary focus will remain on safeguarding the rupiah's value while ensuring monetary policy supports economic growth.

Pardede projects that BI's key interest rate, the BI-Rate, will likely stay at 5.75 percent through the end of 2026 and possibly into 2027. Despite July's inflation rate of 2.88 percent, he believes the conditions are not yet ripe for an interest rate cut. Significant external pressures and ongoing concerns about the rupiah's value necessitate caution.

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Based on the available material, we see the biggest possibility is policy continuity, not a drastic change in direction.

The rupiah is expected to trade between Rp17,800 and Rp18,000 against the U.S. dollar by the end of 2026. Pardede emphasized that inflation alone should not dictate interest rate decisions. A sustainable rupiah, improved capital flows, stabilized foreign exchange reserves, and easing global interest rate pressures are crucial prerequisites for any rate reduction.

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The BI-Rate cut should not be done just because inflation is already low. The room for reduction is only safer if the rupiah is sustainably stable, capital flows improve, foreign exchange reserves stop declining, and pressure from global interest rates eases.

Geopolitical uncertainties, high global interest rates, volatile capital flows, and current account pressures all contribute to the strain on the rupiah. Pardede advises BI to employ a multifaceted strategy, including foreign exchange interventions and liquidity management, rather than relying solely on interest rate adjustments.

Coordination between the government and BI is vital for economic stimulus, but Pardede stressed the importance of maintaining a clear demarcation between fiscal needs and monetary policy. The placement of government budget balances in state-owned banks, while potentially increasing liquidity, requires careful management to avoid overheating the economy, rapid credit expansion, or making rupiah assets less attractive.

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What must be maintained is a clear boundary between coordination and fiscal dominance in monetary policy.