By Ying Xian Wong
Indonesia's central bank snapped a long-running pause to deliver its first rate hike in over two years, making a pre-emptive strike against the inflation threat posed by the conflict in the Middle East.
Wednesday's move marks Bank Indonesia's first rate hike since April 2024, and the first time since November 2022 that it has tightened by 50 basis points.
The size of the move surprised markets, and underscores how seriously policymakers are responding to the fallout from the war, which has pushed the rupiah to a series of record lows.
Prior to the bold decision, the central bank had sat on the sidelines since its last round of easing in September last year.
Its benchmark seven-day reverse repo rate now stands at 5.25%. The overnight deposit facility and lending facility rates were also raised by 50 basis points each to 4.25% and 6.0% respectively.
Bank Indonesia joins the ranks of other central banks in economies like Singapore and Australia that have tightened policy settings since the Iran war broke out in late February.
As the tensions drags on and inflation data signals broadening pressures from high energy prices, expectations are growing for more hawkish turns by central banks, including the Federal Reserve.
It's a tough call to make: tighten policy at the risk of curbing growth or wait at the risk of falling behind the curve on inflation.
For Bank Indonesia, matters are complicated by the slump of the rupiah.
The currency is one of the worst performers in Asia, depreciating sharply against the dollar as its sensitivity to oil prices compounds concerns about domestic policymaking.
BI Gov. Perry Warjiyo said Wednesday's rate-hike is a follow-up measure to stabilize the rupiah amid the impact of the Middle East crisis.
The decision also serves to keep inflation on target and strengthen Indonesia's resilience against global shocks, he said.
Warjiyo added that the rate hike won't impede economic activity and maintained Indonesia's 2026 growth target at 4.9%-5.7%, citing support from government spending and accommodative policies.
Policymakers warned about the danger of higher global oil and commodity prices fueling domestic price pressures, and pledged to strengthen BI's monetary policy mix to keep inflation within the 1.5%-3.5% target range over 2026 and 2027.
The outsized rate hike shored up the Indonesian currency initially, with the dollar falling 0.5% to 17,600 rupiah in afternoon trade, but volatility seems likely to persist.
Any respite for the rupiah could be fleeting until the headwinds pressuring it abate, Capital Economics' Jason Tuvey said in a note.
While the war-related terms-of-trade shock is partly to blame for the rupiah's weakness, investor concerns over government policymaking remain the main driver, the economist said.
A sustainable stabilization would require authorities to shift away from populist, interventionist policies toward more investor-friendly ones, he added. Without that, the rupiah will come under pressure again, and more rate hikes are likely.
Barclays economists also expect further tightening ahead.
Once currency pressures moderate, Bank Indonesia will likely pivot back to rate cuts, though uncertainty over the timing remains high, Barclays's Brian Tan said in a note.
Write to Ying Xian Wong at yingxian.wong@wsj.com
(END) Dow Jones Newswires
05-20-26 0621ET
