Jakarta. Bank Indonesia unexpectedly delivered a larger-than-anticipated interest rate hike on Wednesday, raising its benchmark BI Rate by 50 basis points to 5.25% as the central bank moved aggressively to defend the rupiah amid escalating global market volatility triggered by the Middle East conflict.

The decision exceeded market expectations, as most economists surveyed by Bloomberg had projected only a 25-basis-point increase to 5%.

“Based on various assessments of the economic outlook, Bank Indonesia’s Board of Governors Meeting on May 19-20, 2026 decided to raise the BI Rate to 5.25%. Accordingly, the deposit facility rate was also increased to 4.25%, while the lending facility rate rose to 6%,” Bank Indonesia Governor Perry Warjiyo said during a press conference after the policy meeting.

Perry said the move was aimed at strengthening rupiah stabilization efforts as global financial market turbulence intensified following the Middle East conflict, while also ensuring inflation remains within the central bank’s target range.

“This monetary policy is necessary to maintain rupiah stability and keep inflation in 2026 and 2027 within the target range of 2.5% plus or minus 1%,” he said.

In addition to the BI Rate hike, the central bank also raised the Deposit Facility rate to 4.25% and the Lending Facility rate to 6%.

Bank Indonesia said the decision was in line with its 2026 pro-stability monetary policy stance aimed at strengthening Indonesia’s external resilience against global shocks while ensuring inflation remains under control within the 2.5% ±1% target range for 2026-2027.

The move also aligned with expectations from some economists. Josua Pardede said pressure on the rupiah was no longer temporary, prompting Bank Indonesia to send a stronger policy signal to the market.

“If BI were to merely hold rates without delivering a stronger policy signal, the market could view the central bank as falling behind the curve in responding to pressure, increasing the risk of further rupiah weakening,” Josua said on Tuesday.

Josua acknowledged that higher interest rates could weigh on the financial sector and businesses, potentially slowing lending rate cuts, increasing corporate financing costs, and prolonging short-term volatility in the bond market.

However, he argued that those risks were still relatively smaller than the consequences of a prolonged and uncontrolled rupiah depreciation.

“A prolonged rupiah weakening could raise import costs, squeeze corporate margins, increase the burden of energy subsidies, and weaken investor confidence in rupiah-denominated assets,” Josua said.

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