Quick summary: Bank Indonesia has implemented an unexpected 25 basis point interest rate increase to 5.50%in a rare off cycle monetary policy decision engineered to stabilise the rupiah following sharp declines triggered by Middle Eastern geopolitical conflict and domestic fiscal pressures. The urgent intervention succeeded in briefly rallying local equity markets and pulling the currency back from historic lows after prior government bond sales and 12 billion dollars in foreign exchange reserve depletions failed to arrest the slide. This decisive action underscores a critical necessity for coordinated public policy and disciplined national spending frameworks to protect macroeconomic stability, maintain long-term inflation targets, and safeguard the economic well-being of citizens against severe global market volatility.
Indonesia’s central bank has unexpectedly raised interest rates by 25 basis points in a rare off-cycle decision aimed at stabilising the rupiah, which has hit a series of record lows amid global volatility and domestic pressures.
Bank Indonesia lifted its benchmark rate to 5.50%, marking the first off-cycle hike in eight years. It follows a larger-than-expected 50 basis point increase in May.
The rupiah has fallen 8% this year and 7% since the Iran war erupted, making it one of the world’s worst-performing currencies. In the past three weeks, it has experienced its steepest drop since 2020. The monetary board is scheduled to meet next week.
“This rate hike is a further step to strengthen the rupiah’s exchange rate stabilisation against the impact of high global volatility caused by the war in the Middle East and a pre-emptive measure to maintain inflation in 2026 and 2027 within the target range,” Bank Indonesia said in a statement.
The rupiah strengthened to close at 18,050 per US dollar after the decision, having touched a record low of 18,190 the previous day. The Jakarta stock exchange, which has lost over a 3rd of its value in 2026, rallied to close 7.6% higher.
Efforts to support the currency have so far proved unsuccessful despite last month’s 50 basis point hike. Indonesia’s foreign exchange reserves have dropped by $12 billion this year, falling to $144.9 billion in May after a further decline of $1.3 billion , their lowest level in nearly two years. This occurred despite a government sale of $3.5 billion in US dollar- and euro-denominated bonds.
The rupiah has faced pressure from multiple factors, including President Prabowo Subianto’s big spending plans, a ballooning fuel subsidy budget, controversial new commodity export policies, and doubts about the central bank’s autonomy.
Barclays said in an analyst note that it expected another hike of 25 basis points at next week’s scheduled meeting, with a 50 basis point move also possible. The bank noted a precedent from 2013, when the central bank hiked its policy rate by 50 basis points in an off-cycle meeting before cutting it by 25 basis points days later at a scheduled meeting. Barclays added that Bank Indonesia could begin cutting rates if the rupiah stabilises.
Bank is also using other measures to attract capital inflows, including a 10% reduction in the hedging swap rate for foreign investors and higher 6-, 9-, and 12-month SRBI yields. Bond yields in peer economies such as Mexico, India, and the Philippines are already high, according to David Sumual, chief economist at Bank Central Asia.
Asked by reporters if another rate hike was imminent, Bank Indonesia Governor Perry Warjiyo said: “Please wait for next week.” He added that Indonesia’s foreign exchange reserves were “more than enough” to continue stabilising the rupiah.
Speaking earlier to parliament about 2027 economic projections, Mr Warjiyo said the bank did not want to increase rates but did so to make assets more attractive, stabilise the rupiah, and keep inflation within target. He projected the rupiah at 16,800–17,500 to the dollar in 2027, with stability to be maintained through foreign exchange interventions in offshore and onshore markets.
About the Author
