Bank Indonesia increased the benchmark BI-Rate by 25 basis points to 5.5%, as stated in a Tuesday announcement, prior to the scheduled policy review on June 17-18. This follows a larger-than-anticipated hike of 50 basis points in May.
“Bank Indonesia believes it is necessary to take additional measures to strengthen the stabilization of the rupiah exchange rate by increasing yields and providing various incentives to attract foreign investments,” the central bank noted in its statement.
“The goal of stabilizing the rupiah exchange rate is also to maintain the external resilience of the Indonesian economy and ensure that the inflation targets for 2026 and 2027 are achieved,” it further stated.
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Following the announcement, the rupiah saw a 0.2% gain, while the yield on five-year government bonds remained up by 13 basis points. The stock market surged by 4.8% before the midday break.
This emergency measure highlights rising concerns among policymakers, as the rupiah’s decline has led to a drop in foreign exchange reserves, which have decreased for five consecutive months, marking the longest streak since 2018.
The rate increase came a day after Indonesia’s 10-year government bond yield soared to its highest level in over a year, indicating pressure on local assets as investors reevaluate their holdings in emerging markets.
The rupiah has depreciated about 8% this year, with foreign investors withdrawing over $3.5 billion from Indonesian stocks, leading to a decline of more than 30% in the benchmark equity index. Recently, Bank Indonesia and the government have committed to collaborating to enhance the attractiveness of Indonesian assets for portfolio inflows.
This represents the second off-cycle interest rate hike under Warjiyo’s leadership since assuming office at Bank Indonesia nearly eight years ago. In May 2018, the central bank raised the benchmark rate by 25 basis points to address a selloff in emerging markets driven by rising US interest rates.
