Bank Indonesia took an aggressive step by raising interest rates for the first time in two years to stabilize the rupiah, which has been under pressure to a new low against the US dollar.
The decision was made as global markets were still overshadowed by geopolitical uncertainties and external economic pressures.
BI raised the seven-day reverse repo rate by 50 basis points to 5.25%, higher than most analysts had expected, who had previously only expected a 25 basis point increase or no change.
At the same time, the overnight deposit facility rate was raised to 4.25%, while the lending rate increased to 6.00%.
BI Governor Perry Warjiyo said the move was aimed at strengthening the stability of the rupiah amid global uncertainty stemming from the conflict in the Middle East and ensuring that inflation remains under control within the target for 2026 and 2027.
Pressure on the rupiah has been mounting after the currency fell to a record high of 17,745 against the US dollar before stabilizing around 17,600 after the monetary policy announcement.
So far this year, the rupiah has reportedly depreciated about 6% against the US dollar, making it one of the weakest currencies among emerging economies in Asia.
Investor sentiment towards Indonesia has also been affected by concerns about the impact of the Iran war on the global economy, as well as issues related to Jakarta's government spending, the independence of the central bank and the transparency of the country's capital market.
BI's aggressive move is now seen as an important effort to restore investor confidence and reduce pressure on domestic financial markets.
