Jakarta. Bank Indonesia’s surprise interest rate hike this week signals that pressure on the rupiah has entered a more serious phase, prompting the central bank to take pre-emptive action to prevent currency weakness from escalating into a broader confidence crisis.

Bank Indonesia (BI) raised its benchmark by 25 basis points to 5.5% at an extraordinary weekly Board of Governors Meeting on Tuesday. The central bank also increased the Deposit Facility rate by 25 basis points to 4.5% and the Lending Facility rate by 25 basis points to 6.25%.

“In the midst of the rupiah’s weakening trend, the central bank must send a strong signal that it will not allow the market to form expectations of unlimited depreciation,” Andalas University Economist Syafruddin said on Thursday.

“The decision to raise the BI Rate to 5.5% on June 9 is better understood as an anti-panic measure. Bank Indonesia wants to stop the currency’s downward spiral before it turns into a confidence crisis that would be far more costly to repair,” he added.

However, Syafruddin cautioned that higher interest rates alone would not be enough to support the rupiah if investors remain concerned about fiscal risks, government spending quality, budget deficits, public debt, and the credibility of economic policymaking.

He said while higher rates can improve the attractiveness of rupiah-denominated assets, Indonesia’s sovereign risk premium remains a key factor in shaping investor confidence.

Indonesia’s 10-year credit default swap (CDS) stood at around 154.81 on June 9, indicating that investors continue to demand relatively high compensation for holding Indonesian assets.

Syafruddin said the BI Rate hike could lose effectiveness if CDS spreads remain elevated, as investors may view Indonesia’s risks as stemming not only from interest rate differentials but also from fiscal perceptions and policy governance.

“Bank Indonesia must maintain monetary credibility and market liquidity, the government must uphold fiscal discipline and policy quality, and financial regulators must preserve investor confidence in the domestic market,” he added.

Syafruddin expects the rupiah to trade more steadily in the near term following the rate increase, particularly if the US Dollar Index (DXY) does not strengthen further and Bank Indonesia continues measured intervention in the foreign exchange market.

He said financial markets are likely to react in two phases. The first is a relief rally, as seen on June 9 when the Jakarta Composite Index surged 7.57% to 5,746 from 5,342 as the rupiah strengthened.

The second phase, however, could be more selective as investors begin assessing the impact of higher borrowing costs on credit growth, corporate earnings, equity valuations, and overall economic growth.

“If the rupiah remains below the psychological level of Rp 18,000 per US dollar, CDS spreads decline, and government bond yields remain stable, the JCI could continue its gradual recovery,” Syafruddin said. “But if the rupiah weakens again and CDS stays elevated, the market may conclude that the BI Rate hike is insufficient, potentially triggering renewed pressure on stocks and bonds.”

BI Seeks to Defend Rupiah
Bank Indonesia Governor Perry Warjiyo said the rate increase was aimed at strengthening rupiah stabilization amid heightened global volatility caused by the conflict in the Middle East, while also ensuring inflation remains within the government’s target range of 2.5% ±1% in 2026 and 2027.

“This policy is also intended to increase yields and enhance the attractiveness of Indonesia to foreign portfolio investors,” Perry said.

Perry noted that since the central bank’s May 18-19 policy meeting, the rupiah had weakened more than expected. In addition to ongoing global uncertainty and strong domestic demand for foreign currency, the depreciation was also driven by foreign portfolio outflows.

As a result, Bank Indonesia deemed it necessary to take further measures to stabilize the exchange rate by raising yields and offering additional incentives through its monetary operations to encourage foreign capital inflows.

“Rupiah stabilization is necessary to safeguard Indonesia’s external resilience and ensure that inflation targets for 2026 and 2027 are achieved,” Perry said.