Bank Indonesia unexpectedly raises benchmark interest rate to 5.5 percent

Bank Indonesia (BI) surprised markets Tuesday by raising its benchmark BI rate by 25 basis points to 5.50 percent. The decision, made during a weekly board of governors meeting, also increased the Deposit Facility rate to 4.50 percent and the Lending Facility rate to 6.25 percent.

BI Governor Perry Warjiyo stated the rate hike is a follow-up measure to strengthen rupiah exchange rate stabilization amidst high global volatility, particularly due to the conflict in the Middle East. It also serves as a pre-emptive step to ensure inflation remains within the government's target range of 2.5±1 percent for 2026 and 2027.

Warjiyo explained that the policy also aims to enhance returns, thereby attracting foreign portfolio investment into Indonesia. An evaluation since the May 18-19 meeting indicated that the rupiah's performance was weaker than anticipated. This weakening was attributed to ongoing global shocks and high domestic foreign exchange demand, compounded by foreign portfolio investment outflows.

Consequently, Bank Indonesia views further measures as necessary to stabilize the rupiah. These include increasing returns and offering other incentives through monetary operations to encourage foreign investment inflows. Maintaining rupiah exchange rate stability is crucial for Indonesia's external economic resilience and achieving inflation targets for 2026 and 2027.

In addition to the BI rate increase, Bank Indonesia is implementing other measures to bolster rupiah stabilization and enhance incentives for foreign investment. The central bank is committed to managing exchange rate fluctuations and ensuring macroeconomic stability.