Indonesian Central Bank Raises Benchmark Interest Rate to Record High

In a move aimed at bolstering the rupiah amidst pandemic-era lows, the Indonesian central bank has announced a historic increase in its benchmark interest rate. Bank Indonesia has hiked the BI-Rate by 25 basis points to 6.25%, marking the highest level since the benchmark’s inception in 2016.

This unexpected decision, anticipated by only a fraction of economists surveyed, underscores the urgency of addressing current economic uncertainties. Governor Perry Warjiyo highlighted the need for a robust policy response amidst delays in expected rate cuts by the US Federal Reserve and escalating geopolitical tensions in the Middle East.

The primary objective of the rate hike is to support the rupiah, which has depreciated nearly 5% against the US dollar this year. Despite inflation remaining within the central bank’s target range, a weaker rupiah poses inflationary risks by driving up import costs.

The move by Bank Indonesia is expected to influence other Asian emerging-market central banks grappling with currency depreciation against a strengthening dollar. However, Governor Warjiyo expressed confidence that headline inflation would remain within target for the current and upcoming years.

Following the announcement, the rupiah experienced a modest uptick, trading 0.5% higher against the dollar. Nonetheless, it remains one of Asia’s weakest performers this month, reflecting ongoing pressures.

While the central bank emphasizes its commitment to currency stabilization, analysts caution against interpreting this rate hike as the beginning of a prolonged tightening cycle. With inflation levels low and economic growth modest, the focus remains on supporting the currency in the near term.

To counteract foreign bond sell-offs and stabilize the exchange rate, Bank Indonesia has intervened aggressively in both spot and derivatives markets. Additionally, the government has implemented measures, including instructing state-owned enterprises to limit dollar purchases and urging exporters to repatriate earnings.

The rate hike signifies a concerted effort by Indonesian authorities to navigate challenging economic conditions and safeguard the stability of the rupiah amid global uncertainties.