UOB Economist Predicts Bank Indonesia Will Raise Interest Rates Three Times in Second Half of 2026

Bank Indonesia (BI) is expected to implement three interest rate hikes in the latter half of 2026, according to Enrico Tanuwidjaja, ASEAN Economist at UOB Indonesia. This strategic move by the central bank is designed to counter anticipated market volatility and stabilize the Indonesian rupiah, which has been experiencing outflows of foreign capital.

Tanuwidjaja explained that to attract foreign investment back into the country, Indonesia needs to offer a higher return on investment, necessitating an increase in the benchmark interest rate. He noted that the typical spread between the BI Rate and the U.S. Federal Reserve's rate (Fed Funds Rate) ranges from 250 to 300 basis points. Currently, the BI Rate stands at 5.75%, while the Fed Funds Rate is between 3.50-3.75%. This leaves room for BI to adjust its rates upwards.

The UOB forecast suggests three 25-basis-point increases, potentially bringing the BI Rate to 6.5% from its current 5.75%. These hikes are anticipated in July, August, and again in the fourth quarter of 2026. Tanuwidjaja believes these adjustments are manageable, citing historical data where a 300 basis point spread was maintained between 2018 and 2023, provided the Federal Reserve did not aggressively raise its own rates.

He further elaborated that even if the Federal Reserve increases its rates, Indonesia's substantial domestic liquidity, evidenced by a 25% excess liquidity ratio (AL/DPK), can cushion the impact on economic growth. This large pool of funds, he suggested, needs to be channeled effectively into sectors with high multiplier effects to maintain economic confidence and development.