Bank Indonesia’s Board of Governors Meeting on June 17–18 decided to raise the benchmark interest rate by 25 basis points to 5.50 percent. The move brought the policy rate to its highest level since April 2025. The decision came amid mounting pressure in the domestic financial market over recent weeks, including the continued depreciation of the rupiah.
Commenting on the decision, Dr. Rijadh Djatu Winardi, a lecturer at the UGM Faculty of Economics and Business (FEB UGM), said that Bank Indonesia used the weekly meeting to raise the BI Rate, a decision typically made only during the monthly Board of Governors Meeting. According to Dr. Rijadh, the move signaled a strong sense of urgency from Bank Indonesia. The trigger was evident: on June 9, 2026, the rupiah weakened to Rp18,171 per US dollar, its lowest level since the 1998 Asian financial crisis.
Dr. Rijadh emphasized that global trends are no longer moving in the same direction, although the overall bias in global interest-rate risks has clearly shifted toward a more hawkish monetary policy stance. Just a year ago, major central banks were cutting interest rates simultaneously. However, geopolitical crises have fractured that consensus, leaving each central bank to respond to different domestic conditions. For emerging markets such as Indonesia, this means the era of expectations for coordinated global rate cuts has ended.
“Interest rate risks are now asymmetrically tilted upward, and this is the external environment forcing Bank Indonesia to tighten monetary policy, even as the domestic economy slows,” he said on Friday (Jul. 10).
The global high-interest-rate environment has also affected Indonesia’s economy through exchange rate pressures and capital flows. As returns on US dollar-denominated assets remain elevated, capital outflows from emerging markets are likely to increase. This was reflected in foreign investors’ net sales of Rp73.60 trillion in the Indonesian stock market during the first half of 2026, while yields on 10-year government bonds briefly climbed to around 7.48 percent on June 10 due to heavy selling pressure before easing. Meanwhile, the Jakarta Composite Index (IHSG) declined by approximately 35 percent in the first half of 2026, closing at around 5,643 at the end of June.
“I believe this reflects a combination of valuation repricing due to higher discount rates and investor rotation toward fixed-income instruments, whose yields have become highly competitive compared to expected stock returns,” he explained.
The prolonged period of high interest rates has also placed greater pressure on consumers. One example is the significant increase in the price of non-subsidized fuel, which rose from Rp12,300 to Rp16,250 per liter, while June inflation had already reached 3.34 percent. The combination of higher fuel prices, elevated interest rates, and a weaker rupiah is expected to suppress demand in sectors that rely heavily on consumer spending and credit financing.
Indonesia’s middle class, long regarded as the main driver of household consumption, is increasingly under pressure. Although higher deposit interest rates provide some compensation for savers, the benefits are largely enjoyed by large deposit holders rather than vulnerable households. Dr. Rijadh stressed that the costs of inaction would likely have been far greater. An uncontrolled depreciation of the rupiah beyond Rp18,000 per US dollar would raise the prices of imported goods, including food and energy, disproportionately affecting lower-income groups.
“High interest rates are a visible burden, but a rupiah that loses its anchor would impose a far greater cost if interest rates were not raised,” he said.
In response to these challenges, Dr. Rijadh argued that the government should reinforce its fiscal credibility. Markets are closely monitoring both the widening current account deficit and the expanding fiscal deficit. On the one hand, Indonesia’s issuance of USD1.5 billion in international bonds attracted strong investor demand, indicating continued market interest. On the other hand, investors remain concerned about governance and transparency, particularly regarding legal protection for bondholders.
“Precisely because investor interest remains strong, the government has an opportunity to strengthen governance now before those concerns evolve into a permanent discount on Indonesian assets,” he explained.
He also emphasized the importance of protecting purchasing power through targeted measures. In a high-interest-rate environment, social safety nets and well-targeted subsidies for vulnerable groups are more effective than broad-based stimulus programs, which could widen the fiscal deficit and undermine stabilization efforts. Another priority, he added, is reducing production costs through supply-side policies. Effective supply-side measures are those that lower costs without simply shifting the burden to other areas of the state budget.
Finally, Dr. Rijadh stressed that the government must improve Indonesia’s attractiveness for long-term capital inflows. The country’s first trade deficit in six years signals weakening external resilience, making reforms to attract foreign direct investment (FDI) and promote higher value-added exports increasingly urgent.
Author: Fatihah Salwa Rasyid
Editor: Gusti Grehenson
Post-editor: Priyanandaningrat
Photo: Magnific