By Bagong Suyanto, Professor of Economic Sociology and Chair of the Faculty Advisory Board (BPF) at the Faculty of Social and Political Sciences (FISIP), Airlangga University
Bank Indonesia’s (BI) decision to raise the benchmark interest rate (BI Rate) had, in fact, been predicted by a number of observers. As the rupiah continued to weaken and our foreign exchange reserves dwindled, BI did not have many options available.
Heavy capital outflows and the ongoing conflict in the Middle East were the primary considerations for the BI Board of Governors’ meeting to raise the benchmark interest rate again by 25 basis points to 5.5 percent.
This move was necessary because conditions in the domestic financial market are deteriorating further and the rupiah’s depreciation continues. It is not impossible that the rupiah’s exchange rate could breach the Rp20,000 per U.S. dollar (USD) mark if BI and the government do not take immediate and serious action.
Decisions regarding the benchmark interest rate are typically made during the BI Board of Governors’ monthly meetings. However, this time, the decision to raise interest rates was made during a weekly meeting.
This unusual decision was necessary because the national economy is truly on the brink. The weakening of the rupiah’s exchange rate is showing a more alarming trend than anticipated.
The response developed by BI is a preemptive measure to keep inflation in 2026 and 2027 within the target range of 2.5 percent, plus or minus 1 percent. The decision to raise the benchmark interest rate is also intended to increase yields in order to attract foreign portfolio investment inflows into Indonesia.
Market Psychology
The Bank of Indonesia’s decision to raise the benchmark interest rate is, of course, a short-term measure. This is a tactical step that had to be taken, given that the rupiah is currently under pressure.
In addition to raising the benchmark interest rate to 5.5 percent, the Bank of Indonesia has also taken four steps to stabilize the rupiah’s exchange rate, with the aim of boosting returns and providing other incentives to attract foreign investment.
First, it raised the interest rate structure for Bank Indonesia Rupiah Securities (SRBI) across all 6-, 9-, and 12-month tenors. Second, it lowered the hedging swap rate for foreign investors.
Third, it reopened the auction window for repurchase agreement instruments with tenors of 3, 6, 9, and 12 months for banking institutions. Fourth, intensifying monetary operations in both rupiah and foreign currencies.
BI’s objective in raising the benchmark interest rate is not only to maintain the attractiveness of rupiah-denominated assets but also to anticipate potential inflationary pressures from rising prices of imported goods in the second half of 2026 due to the weakening exchange rate. The government’s top priority at present is indeed to maintain macroeconomic stability and restore market confidence.
The main objective of BI’s decision is to make domestic investment instruments attractive again to foreign investors. By offering more competitive returns—including through the strengthening of SRBI instruments—BI hopes to attract foreign funds back, thereby stabilizing the rupiah.
The government hopes that, with a stable rupiah, the risk of market turmoil will not spiral out of control and will not trigger widespread panic. The government recognizes that the current challenge is market psychology.
If public confidence and market sentiment continue to decline, the impact on economic activity could become even more severe, particularly for businesses that are highly dependent on imported raw materials.
By raising the benchmark interest rate, the government hopes that market volatility will subside, the public will no longer panic over rising prices of various products in the market, and, most importantly, capital inflows will resume their previous growth trajectory.
Synergy
To ensure that BI’s decision to raise interest rates is effective and helps dampen market volatility, BI certainly cannot work alone. BI’s ability to maintain market stability has its limitations.
Efforts to restore and regain investor confidence must involve the government’s active role through policies that are more responsive to the aspirations of businesses and the financial markets.
Synergy between BI and the government is not merely demonstrated by handshakes and joint press conferences. In this context, the government needs to review the various policies it has implemented, particularly development programs that significantly affect our funding capacity.
The government has no choice but to be willing to reevaluate policies that could potentially disrupt investor sentiment and ensure that the investment climate remains conducive.
The government needs to realize that the Bank of Indonesia’s (BI) decision to raise the benchmark interest rate (BI Rate) will, sooner or later, trigger a domino effect across various sectors of the economy.
First, this policy will directly drive up bank lending and deposit interest rates. The policy of raising the benchmark interest rate is like a bitter pill that the national economy must swallow in order to mitigate increasingly unpredictable external volatility.
One of the impacts the government needs to anticipate is that felt by business owners and corporations. For the business world, working capital loans are the lifeblood of operations and expansion. A rise in bank lending rates means that the interest expense burden borne by companies will swell.
This often forces business owners to postpone expansion plans, hold off on hiring new employees, or even implement operational efficiencies. On a broader scale, this slowdown in business activity has the potential to hinder the overall pace of national economic growth.
Second, for the middle and upper classes who rely on bank financing to meet their living expenses—such as buying a home, a car, or other motor vehicles—a rise in interest rates serves as a warning that demands a readjustment of their monthly budgets.
Consumer credit products generally use a floating interest rate scheme. This means that when the benchmark interest rate rises, monthly mortgage or auto loan payments will automatically creep up as well. For families with fixed—or perhaps even declining—incomes, this additional burden of monthly payments will eat into other areas of their budget.
Beyond the negative impacts that need to be anticipated, an increase in the benchmark interest rate does not necessarily have to be viewed pessimistically. Although loan interest rates will rise as a result, this increase also has the potential to encourage businesses to operate more efficiently and selectively.
On the ground, the main challenge posed by rising interest rates is the increased interest expense on loans for working capital and expansion. However, from a macroeconomic perspective, this provides an indirect benefit in the form of a natural screening process for the viability of business projects.
When loan interest rates rise, it forces business operators to be more cautious, selective, and efficient in making expansion decisions. Companies are required to execute projects that truly have high profitability prospects and strong fundamentals, rather than engaging in speculative expansion funded by cheap debt.
This policy ultimately creates a business ecosystem that is healthier, more resilient, and less vulnerable to crisis shocks or over-leverage. This is both the challenge and the opportunity facing the economy following the BI’s decision to raise the benchmark interest rate.
Predicting the Direction of the BI Benchmark Interest Rate Hike
By Bagong Suyanto, Professor of Economic Sociology and Chair of the Faculty Advisory Board (BPF) at the Faculty of Social and Political Sciences (FISIP), Airlangga University
Bank Indonesia’s (BI) decision to raise the benchmark interest rate (BI Rate) had, in fact, been predicted by a number of observers. As the rupiah continued to weaken and our foreign exchange reserves dwindled, BI did not have many options available.
Heavy capital outflows and the ongoing conflict in the Middle East were the primary considerations for the BI Board of Governors’ meeting to raise the benchmark interest rate again by 25 basis points to 5.5 percent.
This move was necessary because conditions in the domestic financial market are deteriorating further and the rupiah’s depreciation continues. It is not impossible that the rupiah’s exchange rate could breach the Rp20,000 per U.S. dollar (USD) mark if BI and the government do not take immediate and serious action.
Decisions regarding the benchmark interest rate are typically made during the BI Board of Governors’ monthly meetings. However, this time, the decision to raise interest rates was made during a weekly meeting.
This unusual decision was necessary because the national economy is truly on the brink. The weakening of the rupiah’s exchange rate is showing a more alarming trend than anticipated.
The response developed by BI is a preemptive measure to keep inflation in 2026 and 2027 within the target range of 2.5 percent, plus or minus 1 percent. The decision to raise the benchmark interest rate is also intended to increase yields in order to attract foreign portfolio investment inflows into Indonesia.
Market Psychology
The Bank of Indonesia’s decision to raise the benchmark interest rate is, of course, a short-term measure. This is a tactical step that had to be taken, given that the rupiah is currently under pressure.
In addition to raising the benchmark interest rate to 5.5 percent, the Bank of Indonesia has also taken four steps to stabilize the rupiah’s exchange rate, with the aim of boosting returns and providing other incentives to attract foreign investment.
First, it raised the interest rate structure for Bank Indonesia Rupiah Securities (SRBI) across all 6-, 9-, and 12-month tenors. Second, it lowered the hedging swap rate for foreign investors.
Third, it reopened the auction window for repurchase agreement instruments with tenors of 3, 6, 9, and 12 months for banking institutions. Fourth, intensifying monetary operations in both rupiah and foreign currencies.
BI’s objective in raising the benchmark interest rate is not only to maintain the attractiveness of rupiah-denominated assets but also to anticipate potential inflationary pressures from rising prices of imported goods in the second half of 2026 due to the weakening exchange rate. The government’s top priority at present is indeed to maintain macroeconomic stability and restore market confidence.
The main objective of BI’s decision is to make domestic investment instruments attractive again to foreign investors. By offering more competitive returns—including through the strengthening of SRBI instruments—BI hopes to attract foreign funds back, thereby stabilizing the rupiah.
The government hopes that, with a stable rupiah, the risk of market turmoil will not spiral out of control and will not trigger widespread panic. The government recognizes that the current challenge is market psychology.
If public confidence and market sentiment continue to decline, the impact on economic activity could become even more severe, particularly for businesses that are highly dependent on imported raw materials.
By raising the benchmark interest rate, the government hopes that market volatility will subside, the public will no longer panic over rising prices of various products in the market, and, most importantly, capital inflows will resume their previous growth trajectory.
Synergy
To ensure that BI’s decision to raise interest rates is effective and helps dampen market volatility, BI certainly cannot work alone. BI’s ability to maintain market stability has its limitations.
Efforts to restore and regain investor confidence must involve the government’s active role through policies that are more responsive to the aspirations of businesses and the financial markets.
Synergy between BI and the government is not merely demonstrated by handshakes and joint press conferences. In this context, the government needs to review the various policies it has implemented, particularly development programs that significantly affect our funding capacity.
The government has no choice but to be willing to reevaluate policies that could potentially disrupt investor sentiment and ensure that the investment climate remains conducive.
The government needs to realize that the Bank of Indonesia’s (BI) decision to raise the benchmark interest rate (BI Rate) will, sooner or later, trigger a domino effect across various sectors of the economy.
First, this policy will directly drive up bank lending and deposit interest rates. The policy of raising the benchmark interest rate is like a bitter pill that the national economy must swallow in order to mitigate increasingly unpredictable external volatility.
One of the impacts the government needs to anticipate is that felt by business owners and corporations. For the business world, working capital loans are the lifeblood of operations and expansion. A rise in bank lending rates means that the interest expense burden borne by companies will swell.
This often forces business owners to postpone expansion plans, hold off on hiring new employees, or even implement operational efficiencies. On a broader scale, this slowdown in business activity has the potential to hinder the overall pace of national economic growth.
Second, for the middle and upper classes who rely on bank financing to meet their living expenses—such as buying a home, a car, or other motor vehicles—a rise in interest rates serves as a warning that demands a readjustment of their monthly budgets.
Consumer credit products generally use a floating interest rate scheme. This means that when the benchmark interest rate rises, monthly mortgage or auto loan payments will automatically creep up as well. For families with fixed—or perhaps even declining—incomes, this additional burden of monthly payments will eat into other areas of their budget.
Beyond the negative impacts that need to be anticipated, an increase in the benchmark interest rate does not necessarily have to be viewed pessimistically. Although loan interest rates will rise as a result, this increase also has the potential to encourage businesses to operate more efficiently and selectively.
On the ground, the main challenge posed by rising interest rates is the increased interest expense on loans for working capital and expansion. However, from a macroeconomic perspective, this provides an indirect benefit in the form of a natural screening process for the viability of business projects.
When loan interest rates rise, it forces business operators to be more cautious, selective, and efficient in making expansion decisions. Companies are required to execute projects that truly have high profitability prospects and strong fundamentals, rather than engaging in speculative expansion funded by cheap debt.
This policy ultimately creates a business ecosystem that is healthier, more resilient, and less vulnerable to crisis shocks or over-leverage. This is both the challenge and the opportunity facing the economy following the BI’s decision to raise the benchmark interest rate.
