Bank Indonesia policy officials defended the central bank’s combination of unchanged benchmark interest rates, a higher deposit facility rate and planned reserve cuts on October 23, 2026. They said the measures were designed to improve how monetary policy reaches the broader economy, after economists questioned whether the package sent conflicting signals.
Key Takeaways
- The higher deposit facility rate restores a symmetric corridor around the unchanged 5.75% benchmark.
- Planned reserve changes are expected to release about 90 trillion rupiah into the banking system.
- Officials want banks to favor shorter-dated instruments rather than park excess funds in central-bank securities.
Table of Contents
- Bank Indonesia policy changes serve different purposes
- Reserve cuts target liquidity, not a benchmark-rate reduction
- Shorter-dated instruments and a reassessment by economists
- Conclusion
Bank Indonesia policy changes serve different purposes
Bank Indonesia’s October monetary policy decision kept the BI-Rate at 5.75% and the lending facility rate at 6.50%, while raising the deposit facility rate to 5.00%. The October 20–21 meeting also approved phased reserve-requirement reductions and stronger foreign-exchange hedging incentives.
Firman Mochtar, the central bank’s head of economic and monetary policy, said on October 23 that the deposit-rate increase aligned monetary operations with the benchmark rate. Both facility rates now sit 75 basis points from the BI-Rate, restoring symmetry to the interest-rate corridor.
Previously, the deposit facility rate had been 100 basis points below the benchmark. Firman linked that wider gap to government cash placements in commercial banks, which had increased banking-system liquidity. Some of those funds were subsequently withdrawn following a change in finance ministry leadership.
The distinction is between the price of short-term money and the amount of liquidity available to banks. Adjusting the corridor while reducing reserve requirements does not necessarily mean the central bank is trying to move its benchmark rate in opposing directions.
| Item | Details |
|---|---|
| Conventional bank reserves | Scheduled to fall from 9% to 8% on November 1, 2026, then to 7% on December 1. |
| Sharia bank and business-unit reserves | Scheduled to fall from 7.5% to 6.5% on November 1, 2026, then to 5.5% on December 1. |
| Liquidity incentive policy | KLM allowance reduced from 6% to 5%, effective December 1, 2026. |
| Six-month DNDF hedging | Premium reduction increased from 25% to 40% for eligible underlying foreign funding. |
| Twelve-month DNDF hedging | Premium reduction increased from 30% to 45% for eligible underlying foreign funding. |
Reserve cuts target liquidity, not a benchmark-rate reduction
Bank Indonesia plans cumulative reserve-requirement cuts of 200 basis points by December. Alongside changes to its liquidity incentive scheme, the measures are expected to bring the effective reserve ratio to around 2%, approximately one percentage point below its previous level.
The central bank estimates that the changes will inject about 90 trillion rupiah, or $4.98 billion, into the banking system. Firman said the additional liquidity had been calibrated to remain consistent with the benchmark rate and economic activity.
The headline reserve cut and the smaller decline in the effective ratio reflect the accompanying adjustment to liquidity incentives. The announced implementation schedule also separates the reserve changes from the enhanced hedging discounts intended to encourage foreign funding.
Shorter-dated instruments and a reassessment by economists
Erwin Gunawan Hutapea, Bank Indonesia’s head of monetary management, said officials wanted commercial banks to favor shorter-dated instruments instead of parking excess funds in the central bank’s rupiah-denominated securities, known as SRBI.
Bank Indonesia had previously raised SRBI interest rates to attract foreign capital. Erwin said the outstanding amount had fallen from 1,096 trillion rupiah in July to below 950 trillion rupiah.
Bank of America economists initially characterized the package as simultaneously holding, raising and cutting rates. They later said it appeared less contradictory than first thought, arguing that reserve cuts did not necessarily reduce Bank Indonesia’s willingness to raise its benchmark if economic conditions required it.
Conclusion
The next scheduled step is the first reserve-requirement reduction on November 1, followed by a second cut and revised liquidity incentives on December 1. Those changes will implement the liquidity side of the package while the benchmark rate remains unchanged.
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