Indonesia hikes rates in surprise off-cycle move to prop up sinking rupiah

JAKARTA — Indonesia's central bank unexpectedly raised interest rates by 25 basis points on Tuesday (June 9), in a rare off-cycle move to try to stabilise the rupiah currency after it hit a succession of record lows.

Bank Indonesia said the off-cycle hike of the benchmark rate — the first in eight years — to 5.50 per cent was necessary because the rupiah exchange rate had weakened more than anticipated since its last meeting in May, when it raised rates by a greater than expected 50 basis points.

The monetary board is scheduled to meet next week as the rupiah comes under mounting pressure having fallen eight per cent this year and seven per cent since the Iran war erupted, making it one of the world's worst performing currencies.

In the past three weeks it has experienced its steepest drop since 2020.

"This rate hike is a further step to strengthen the rupiah's exchange rate stabilisation against the impact of high global volatility caused by the war in the Middle East and a preemptive measure to maintain inflation in 2026 and 2027 within the target range," BI said in a statement.

The rupiah strengthened to close 18,050 after Tuesdays decision, a day after touching another record low of 18,190 per US dollar. 

The Jakarta stock exchange, which has lost over a third of its value in 2026, also rallied to close 7.6 per cent up.

Battle to stabilise currency

Efforts to shore-up the currency have been unsuccessful, even after last month's 50 basis point hike and a US$12 billion (S$15.4 billion) drop this year in Indonesia's foreign exchange reserves, which the central bank uses to defend the rupiah.

The rupiah has been under pressure from a multitude of factors that have unnerved investors, from President Prabowo Subianto's big spending plans and a ballooning fuel subsidy budget to controversial new commodity export policies and doubts about the central bank's autonomy.

Interventions in the currency markets have drained forex reserves to their lowest level in nearly two years. 

Those dropped by US$1.3 billion in May to US$144.9 billion, despite a government sale of US$3.5 billion sale of US dollar- and euro-denominated bonds.

Barclays in an analyst note said it expected another hike of 25 basis points next week, with a 50 basis points move possible.

Such back-to-back moves have a precedent, it said, with the central bank in 2013 hiking its policy rate by 50 basis points in an off-cycle meeting before cutting it by 25 basis points just days later in a scheduled meeting. 

It could start making cuts if the rupiah is stabilised, Barclays said.

FX reserves 'more than enough', governor says

Asked by reporters on Tuesday if another rate hike was imminent, BI Governor Perry Warjiyo said "please wait for next week".

Indonesia's foreign exchange reserves were "more than enough" to continue to stabilise the rupiah, he added.

Warjiyo spoke earlier to parliament about 2027 economic projections and said the bank did not want to increase rates, but did so to make assets more attractive, stabilise the rupiah and keep inflation within target.

He projected the rupiah at 16,800 to 17,500 to the dollar in 2027, with its stability maintained through foreign exchange interventions in offshore and onshore markets.

BI also said its policy intended to increase returns by attracting foreign portfolio investment inflows.

Bond yields in peer economies like Mexico, India, and the Philippines are already high, David Sumual, Chief Economist at Bank Central Asia said.

Barclay's said BI was also using other measures to attract capital inflows, including a 10 per cent reduction in the hedging swap rate for foreign investors as well as higher six-, nine- and 12-month SRBI yields.

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