Indonesia's central bank unexpectedly raised its policy rate by 25 basis points, bringing the 7-day reverse repo rate to 5.5% from 5.25%, in an effort to strengthen the rupiah, which has fallen to record lows against the US dollar [1]. This move defied economists' expectations, as a Reuters poll had anticipated rates would remain unchanged [1]. The decision follows a series of interventions, including a larger-than-expected 50 basis point hike in May and active participation in the forex markets, but these measures have so far failed to halt the rupiah's decline [1]. On June 8, the rupiah reached a record low of 18,190 against the dollar, marking an over 8% depreciation year-to-date [1].
The central bank's actions come amid significant foreign portfolio investment outflows, with investors pulling out of Jakarta's equity markets and the Jakarta Composite Index tumbling more than 35% since the start of the year [1]. To stabilize the currency, Indonesia has also drawn down its foreign exchange reserves to their lowest level in nearly two years [1]. Bank Indonesia described the rate hike as a "pre-emptive measure" to keep inflation within the government's target range of 1.5% to 3.5% for 2026 and 2027, and to enhance yields to attract foreign investment [1].
Inflationary pressures are mounting, with May's inflation reading at 3.08%, up from 2.42% previously and exceeding Reuters' estimate of 2.97% [1]. The central bank's move also follows a new mandate from Indonesia's parliament to foster an economic environment conducive to real sector growth and job creation [1]. Despite this, DBS Group Research noted that monetary policy is expected to prioritize financial market stability in the near term, with further tightening likely to defend the currency [1].
Following the surprise rate hike, the rupiah strengthened by 0.66% to 18,050 on Tuesday [1].
CONCLUSION
Indonesia's surprise rate hike underscores the central bank's commitment to stabilizing the rupiah and containing inflation amid significant market pressures and capital outflows. While the immediate market reaction saw a modest strengthening of the currency, ongoing volatility and further policy tightening remain likely as authorities prioritize financial stability.