Bank of Indonesia Makes a Drastic Policy U-turn, Hiking Rates Unexpectedly by 50 Basis Points

The Indonesian central bank unexpectedly increased the benchmark 7-day reverse repurchase rate (BI7DRR) by 50 basis points to 5.25% on Wednesday, with the overnight deposit rate and lending facility rate also rising to 4.25% and 6.00%, respectively. This marks thefirst interest rate hike in two years and the largest single increase since 2022.

Out of 29 economists surveyed by Reuters, only one predicted a 50 basis point rate hike, with the majority expecting only a 25 basis point increase or no change. Similarly, a Bloomberg survey showed that out of 41 analysts, 25 expected a 25 basis point increase, while 15 anticipated no change.

Bank Indonesia Governor Perry Warjiyo stated at a press conference that the purpose of the rate hike is to counter the impact of the Middle East crisis, stabilize the rupiah exchange rate, and as a preemptive measure to keep inflation within the target range.

The rupiah continued to gain against the US dollar, rising 0.5% to 17,610, gradually moving away from historical lows. The stock market remained bearish, with government bond yields increasing.

From Continuous Easing to Sudden Braking

Throughout 2025, Bank Indonesia had slashed rates five times by a total of 150 basis points, reducing the rate from 6% to a four-year low of 4.75%, and then remained on hold for six consecutive months since October. The sudden policy reversal, with a 50 basis point rate hike, highlights that external pressures have exceeded Bank Indonesia's previous assessments.

The Rupiah Hits a New Historical Low, with High Inflation Pressure

The immediate catalyst was the sustained plunge of the rupiah. On May 18th, the rupiah fell to a historical low of 17,666 against the US dollar. Since the outbreak of the military conflict in the Middle East at the end of February, the rupiah has depreciated by approximately 5%, and market concerns about fiscal management and central bank independence had already put pressure on the exchange rate.

To protect the currency, the central bank's foreign exchange reserves dropped from $156.47 billion to $146.2 billion within four months, with over $10 billion spent; the rupiah-denominated securities (SRBI) yield was raised from 4.9% to 6.5%, attracting about 78 trillion rupiah in foreign capital, but still failing to reverse the trend.

On the inflation front, the annualized inflation rate in February rose to 4.76%, the highest since March 2023. Externally, a strong US dollar and rising oil prices have increased the risk of imported inflation, with the 10-year Indonesian government bond yields climbing to 6.82% - 6.86%, and the pressure has spread from the forex market to the bond market and stock market.

The Interest Rate Hike Signals a Significant Start, May be the Beginning of a Tightening Cycle

Some economists warned that this interest rate hike may mark the beginning of a new tightening cycle, with the signal significance far outweighing the 50 basis points itself.

"Bank Indonesia has sent a strong signal," said华侨银行 economist Lavanya Venkateswaran. "This is expected to bolster short-term market sentiment and pave the way for further rate hikes. We anticipate that interest rates will be increased again later on."

Rising financing costs suppress earnings expectations, with high-leverage sectors being the first impacted. Singapore has surpassed Indonesia to become the largest stock market in Southeast Asia, reflecting the waning confidence of foreign capital. The interest rate hike raises yields and depresses bond prices, putting pressure on short-term positions, but higher interest rates may attract international capital to flow back.

The Indonesian economy's GDP grew 5.39% year-on-year in the fourth quarter of 2025, the strongest in nearly three years. Economists pointed out that the purpose of the rate hike is to stabilize the exchange rate and prevent import costs from spiraling out of control, rather than to suppress growth. However, against a backdrop of increasing global uncertainties, Bank Indonesia's tightrope walk between exchange rate stability and economic growth has only just begun.