BI Predicts Fed Rate Will Drop To 3.5 Percent

JAKARTA - Bank Indonesia (BI) projects that the Fed interest rate will double in 2025, 50 basis points (bps) each, to 4 percent (baseline) level, and continue to 3.5 percent level by the end of 2026.

"Inflation in America will be slower in derivative. It is estimated that American interest rates will fall from 4 percent this year to 3.5 percent by 2026," said BI Governor Perry Warjiyo quoting Antara.

However, the United States (US) fiscal deficit is expected to swell from 6.4 percent to Gross Domestic Product (GDP) this year to 7 percent of GDP in 2026, thus encouraging the yield of US government bonds to remain high.

In the first quarter of 2026, the 10-year US Treasury yield is predicted to reach 4.7 percent and remain at a high level afterward.

"Of course this will later affect the SBN yield and how it relates to fiscal financing and also with financial system stability in Indonesia," said Perry.

In terms of exchange rates, Perry noted that recently there has been a tendency for the US dollar not to be as strong as before. Global financial market perceptions are starting to change, where the flow of assets that had previously flocked to the US has now shifted to instruments that are considered safer, such as gold, as well as to financial assets in emerging markets.

"Of course we need to be aware because the inflow-outflow volatility of the portfolio and the volatility of the exchange rate are very vulnerable to global uncertainty movements and to world geopoliticals," he said.

Perry reminded that global conditions were met with uncertainty, such as being driven by tariff policy factors from the United States (US) and geopolitical tensions in the Middle East.

In 2026, global economic growth is predicted to stagnate at the level of 3 percent. In this regard, BI highlighted the tendency for economic growth in Indonesia's main trading partner countries to decline.

US economic growth is forecasted to be around 2.1 percent this year and will drop to 1.8 percent in 2026, even with a recession risk.

The economy of Europe and Japan is also under pressure. Meanwhile, China's economy, as Indonesia's second main trading partner country, has also slowed down, which is predicted to be 4.3 percent in 2025 to 4.1 percent in 2026.

"What is still the hope is that India is expected to grow 6.6 percent by 2025 and 2026," Perry said.

He reminded that the condition of global economic growth, trade fragmentation, and disruption of supply chains are challenges for Indonesia in encouraging exports as a source of national economic growth.

Overall, global economic conditions demand that Indonesia continue to strengthen economic resilience to the impact of external rambatan. Stability must be maintained, including exchange rate stability and bond market.

However, at the same time, Perry emphasized that the stimulus for economic growth also needs to be continuously encouraged, both through fiscal policies, central bank policies, and policies that support the real sector, especially through the Asta Cita program.