Bank Indonesia Surprises With Jumbo Rate Hike to Defend Rupiah

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(Bloomberg) — Indonesia’s central bank delivered a larger-than-expected interest-rate increase to intensify its defense of the rupiah after the currency tumbled to successive record lows this month.

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Bank Indonesia raised the BI-Rate by 50 basis points to 5.25% on Wednesday, the first such move since 2022. The move was anticipated by only one economist in a Bloomberg News survey. Twenty-five analysts had expected a quarter-point move, while 15 predicted a pause. The benchmark rate had been held at 4.75% since October.

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“BI sent a strong signal,” said Oversea-Chinese Banking Corp. economist Lavanya Venkateswaran. “This will likely help buoy near-term sentiment and paves the way for further rate hikes, which we expect will be forthcoming.”

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The rupiah extended earlier gains to 0.5% to 17,610 per dollar, moving away from an all-time low. Stocks held earlier losses, while bond yields rose.

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“The decision serves as a follow-up measure to strengthen the stabilization of the rupiah against the impact of heightened global volatility stemming from the Middle East conflict, as well as a preemptive step to ensure inflation in 2026 and 2027 remains within the targeted range of 1.5%–3.5%,” Governor Perry Warjiyo said in a briefing.

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The rupiah’s freefall has become a matter of growing national concern. President Prabowo Subianto on Wednesday announced the creation of a state-owned entity that will centralize exports of Indonesia’s strategic commodities such as palm oil, coal, and ferroalloys, in a bid to plug revenue leaks and keep more dollars at home.

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Earlier this week, lawmakers also grilled the central bank chief about how else he can support the rupiah, saying the weaker currency was beginning to hit industries and push up food prices.

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Bank Indonesia had earlier resisted rate hikes, given relatively contained inflation and the need to keep supporting economic growth. It’s largely resorted to heavy FX intervention — using up $10 billion of its reserves this year — to stabilize the currency.

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The pivot to tightening, however, comes amid a protracted US-Israel war on Iran, with higher energy prices threatening to strain the budget, spur price pressures and slow momentum in Southeast Asia’s largest economy.

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As the Middle East uncertainty sends the rupiah to multiple record lows and bond yields to a one-year high, Warjiyo pledged to continue intensifying FX interventions. The Finance Ministry has also bought about $113 million of government bonds daily in the last week to cool rising yields and stem capital outflows.

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The central bank chief reiterated that the rupiah remains undervalued and should strengthen in the coming quarter as domestic demand for dollars eases. He said earlier this week that the currency should still trade at an average of around 16,500 per dollar this year.

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—With assistance from Prima Wirayani.

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(Updates with analyst comment and market reaction from third paragraph.)

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