BI Rate Predicted to Fall Three Times Throughout 2026, Ending at 4.00%

HSBC predicts that Bank Indonesia (BI) has the opportunity to lower its benchmark interest rate (BI Rate) by up to 3 times 25 basis points (bps) throughout 2026. With easing occurring in each of the first, second, and third quarters of 2026, BI's benchmark interest rate at the end of the year is expected to reach 4.00%.

Chief India and ASEAN Economist Group HSBC Global Investment Pranjul Bhandari believes that the decline in the BI Rate continues the trend of monetary easing that has been occurring throughout 2025. Last year, the central bank lowered the BI Rate by a total of 125 basis points. Reflecting on this, the decline in the BI Rate is expected to continue.

He explained that the recent increase in domestic household consumption in Indonesia cannot be separated from the impact of monetary policy easing and additional economic stimulus from the fiscal side.

"We estimate that inflation will remain within the target range of 1.5%-3.5% in 2026. Despite a slight increase in food price inflation, low fuel and energy prices, and core inflation affected by Chinese deflation, there is room for BI to ease and support growth," said Bhandari in the HSBC Economic Outlook 2026 briefing held virtually on Monday (12/01/2026).

In this outlook, the BI Rate will gradually decrease by 25 basis points in the first, second, and third quarters of 2026. Thus, by the end of the year, the BI Rate is expected to be at 4.00%. Unfortunately, there are no further details on the month in which BI will lower the BI Rate.

Although there is still room for interest rate cuts, Bhandari emphasized that external financial factors cannot be ignored. Although Indonesia's trade balance currently remains in surplus due to strong front-loading of exports , the overall balance of payments is in negative territory due to portfolio capital outflows and weak capital inflows through FDI.

"The rupiah has depreciated 1.5% against the US dollar since mid-September and 3.5% since the beginning of the year, despite the continued weakening of the dollar index (DXY)," he said.

Considering BI's policy rhythm, which seeks to maintain inflation while continuing to encourage growth by lowering the benchmark interest rate and preventing an increase in capital outflows, Bhandari believes that benchmark interest rate cuts will continue, but using a gradual approach rather than the consecutive cuts seen in July, August, and September 2025.

"We do not expect any interest rate cuts in the near future, but a 75 bps reduction will be spread evenly over three quarters and bring the benchmark interest rate to a low of 4.00% by the end of 2026," said Bhandari.

In addition to being driven by low inflation, monetary policy easing moved faster than fiscal policy, although its effectiveness in terms of credit growth was relatively lower. Furthermore, even if available, BI's room for maneuver in lowering rates tended to be limited because it needed to pay attention to the momentum when the rupiah was not weakening too much.

"Bank Indonesia will not cut its benchmark interest rate when the rupiah exchange rate shows depreciation pressure, so any cuts this year will be opportunistic. BI will try to find the most feasible opportunity when the dollar weakens and there is sufficient room for a cut," he concluded.

Supplementing Bhandari's explanation, Head of Equity Strategy Asia Pacific HSBC Global Investment Herald van der Linde assessed that even though interest rate cuts have a relatively negative impact on banks, the situation in Indonesia is relatively different because banks have greater bargaining power compared to other countries.

"This means that lower interest rates often do not directly impact margin pressure. This can be seen when banks lower deposit rates when the BI Rate is lowered," said Herald.

However, in a worst-case scenario where interest rate cuts could jeopardize margins, banks would tend to target sectors that are sensitive to interest rate changes and benefit from such policies, such as the property and housing sectors, which would immediately feel the direct impact of changes on their installment payments.

Structural factors

Although there is still room for BI Rate to decline throughout the year, LPEM FEB UI researcher Teuku Riefky believes that the transmission of the impact of this monetary policy will not be very significant. For the real sector, BI Rate is a secondary factor, while there are larger structural issues that hinder the formation of aggregate demand.

"The impact of changes in supply by lowering the benchmark interest rate will be limited if structural issues such as income levels, business climate certainty, and purchasing power, which have been hampering demand, are not addressed comprehensively," said Riefky when contacted on Tuesday (01/13/2026).

In addition to the formation of domestic demand, the easing of monetary policy through the reduction of the Fed Fund Rate by the US Federal Reserve is also an external structural factor that will affect the possibility of a BI Rate reduction in the future. The easing of the FFR is seen as a sign of concern over the weakening performance of the labor market along with the continuing pressure of rising inflation in the US.

"The quarter-point reduction in the FFR was anticipated by market players, triggering capital flows to emerging markets, including Indonesia. On the other hand, BI's decision to hold its benchmark interest rate at 4.75% signals to investors that BI is focused on stabilizing inflation after several episodes of rupiah depreciation," he explained.