BI Sees 'Higher for Longer' Era Ahead: What Does It Mean for Markets?

Bank Indonesia (BI) anticipates a prolonged era of higher US interest rates, commonly referred to as the "higher for longer" environment, which will continue to impact global financial markets due to ongoing economic uncertainty. BI Acting Governor Destry Damayanti stated this during a press conference following a meeting of the central bank's Board of Governors in Jakarta.

The prolonged high-rate environment will pose significant challenges to the global financial sector and markets, as the US Federal Funds Rate (FFR) is expected to remain elevated despite persistent inflation in the United States. Factors such as rising oil prices and the need for the US government to finance its budget deficit are also expected to fuel the supply of US government bonds.

Consequently, this will result in high bond yields and interest rates in the US, driving up the US dollar index (DXY) against major currencies. This global situation will undeniably affect Indonesia's economy as well. BI has conducted a comprehensive analysis of the global and domestic economic outlook, projecting a weak global economy for 2026 with growth expected to be around 3.0 percent.

Additionally, global inflation is anticipated to remain elevated at approximately 4.5 percent, prompting tighter monetary policies worldwide. The US Federal Funds Rate is also anticipated to increase in the fourth quarter of 2026, while US Treasury yields have climbed and are expected to stay high due to growing expectations of higher FFR rates and the persistent US budget deficit.

The uncertainty in global financial markets has also caused a lack of interest among global investors in portfolio investments in emerging markets, contributing to the continued strength of the US dollar against both major currencies and emerging-market currencies, as indicated by the DXY and ADXY indexes. BI emphasizes the need for stronger coordination between fiscal and monetary policies to enhance Indonesia's external resilience, maintain stability, and support domestic economic growth.