Jakarta. Bank Permata economist Faisal Rachman expects Bank Indonesia (BI) to raise its benchmark interest rate to 6% in the fourth quarter of 2026 as mounting inflation risks from food prices, global energy costs and rupiah depreciation complicate the monetary policy outlook.

Faisal said the projection takes into account the potential for further inflationary pressures, despite easing core inflation. Indonesia’s annual inflation rate accelerated to 3.28% in September from 3.19% in August, driven largely by rising food prices.

In a research note on Thursday, Faisal warned that supply-side pressures could intensify as the government’s free nutritious meals (MBG) program boosts food demand, while an extreme El Niño event, dubbed “Godzilla El Niño,” threatens agricultural production.

“The MBG program could increase food demand and create risks of higher food inflation. These risks could intensify if an extreme El Niño disrupts agricultural production and pushes food prices higher,” Faisal said.

Rising global energy prices could also complicate the inflation outlook. Keeping domestic energy prices stable amid higher global oil prices could increase the government’s fiscal burden, while raising subsidized energy prices could push up inflation through higher energy and transportation costs.

“If the government needs to adjust subsidized energy prices, the likelihood of BI raising interest rates more aggressively would also increase,” Faisal said.

The outlook for the rupiah presents another challenge. Faisal expects the currency to remain under pressure through the end of 2026, partly due to a widening current account deficit and potential reversals in short-term capital flows, particularly from Bank Indonesia Rupiah Securities (SRBI).

A weaker rupiah could raise the cost of imported raw materials, prompting businesses to pass higher production costs on to consumers.

Faisal’s rate forecast also factors in the possibility of the US Federal Reserve raising its benchmark federal funds rate to 4.25% in the fourth quarter, amid US inflation that remains above the Fed’s target.

Inflation Risks to Persist Into 2027
Bank Permata expects inflationary pressures to remain relatively high through at least the first half of 2027, as El Niño risks and geopolitical tensions continue to weigh on food and energy prices.

The pressures are expected to ease in the second half of the year as global conditions improve and the rupiah outlook strengthens.

Faisal projects annual consumer price inflation to moderate to 2.94% by the end of 2027. However, stronger domestic demand, supported by the government’s economic growth agenda, could add to inflationary pressures.

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