Bank Indonesia kept the benchmark rate on hold at 5.75%, vs consensus expecting a 25bp hike. Although BI struck a cautious tone on the global backdrop, it remained constructive on domestic prospects. The decision to pause after 100bp of cumulative hikes in May-June 2026 underscored a preference to retain policy flexibility in the event of heightened rupiah volatility arising from escalating geopolitical risks or a market reassessment of the US Federal Reserve’s policy path in second half of the year. Accompanying commentary signalled the central bank’s intention to keep financial conditions sufficiently tight to safeguard macroeconomic stability, while tapping on non-rate measures to establish currency stability. BI announced a range of complementary measures, including increase in the macroprudential liquidity incentives for banks, premium reduction for hedge sell-swaps and a move to promote local currency transactions with partner countries, via hedge swaps and DNDF. We maintain our call for one final rate hike in 2H26, premised on a market repricing toward higher US interest rates. Any material shift in the US Fed’s rate direction towards hikes will necessitate further tightening moves by BI. Concurrently, the sovereign’s funding mix of offshore bonds was broadened to include an inaugural CNY-denominated Panda securities, with the debut size pegged at $1bn and launch scheduled for Thursday. 2026 will mark a likely record for non-USD issuances by the govt, via a mix of EUR, JPY, CNH and now, CNY bonds, cumulatively amounting to ~$7.0bn.
While monetary policy maintained a tight bias, the government has initiated measures to address fiscal concerns. Recent affirmative signals indicate that the annual fiscal deficit target of 3% of GDP will be maintained, in line with our view. Budget targets for key flagship schemes are being revised downward to curb spending commitments and channel resources toward subsidies. For instance, allocation towards the free meals program will be cut by a third. Energy prices are a key risk. The gap between the budgeted oil and prevailing levels has re-widened, just as refining margins have surged, posing a pipeline risk for the books. Further worsening of either will require stronger fiscal rationalization efforts to stay within target. Moody’s Ratings maintained its cautious tone despite recent fiscal assurances, in contrast to S&P’s optimism on the ongoing budgetary developments. We do not expect a sovereign rating downgrade this year. However, the negative outlook is likely to be maintained, reflecting underlying vulnerabilities and the absence of sufficient corrective measures to strengthen the medium-term fiscal trajectory. As BI signals a near-term pause and the rupiah is stable, front-end bond yields are likely to ease. With long-end yields remaining broadly range-bound, the spread should widen in the near-term, with an eye on geopolitics.
Subscribe here to receive our economics & macro strategy materials.
Topic
Explore more
E & S Macro StrategyGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
[1] This disclaimer may not apply if the applicable assets fall within the definition of 'financial instruments' that are set out in Article 2(1) EU MAR (e.g. financial instruments that are traded on a regulated market, MTF or OTF, etc.). Section C of Annex I of MiFID2 specifies these 'financial instruments'.