Bank Indonesia and the Rupiah’s prospects over the next five years

Indonesia’s new Bank Indonesia leadership is unlikely to make the rupiah stronger over the next five years, economist Didik J. Rachbini argues. He expects the currency to remain weak and possibly continue weakening, saying a change in central-bank leadership will follow the usual cycle without materially altering the monetary system.

Rachbini links the forecast to both external pressures and domestic constraints. Indonesia has a large economy and a substantial domestic market, but its currency has struggled to strengthen because the economy remains structurally weak in its external sector. He does not expect the new leadership to change that structure.

Bank Indonesia can defend the exchange rate, he writes, but its routine policy tools have limits. When the rupiah comes under sharp pressure, the central bank can raise interest rates to make Indonesian assets more attractive to foreign investors. Higher rates, however, also increase transaction costs and affect businesses, housing loans and domestic investment.

The alternative is to cut rates to encourage investment. Rachbini warns that cutting them too quickly could push investors back toward dollar-denominated assets. In his view, relying conservatively on interest rates alone will not strengthen the rupiah.

He also points to low confidence in the rule of law, corruption, complicated regulations and weak competitiveness as factors weighing on investment and production. A large domestic market, he argues, does not by itself guarantee a strong economy when the country’s external sector remains fragile. The piece presents these views as Rachbini’s personal opinion, not necessarily the position of Republika.