RADAR TULUNGAGUNG – Bank Indonesia raised its benchmark interest rate to 5.25% during its May 2026 Board of Governors meeting, delivering a larger-than-expected move to stabilize the rupiah and shield Indonesia’s economy from intensifying global financial pressures. The Bank Indonesia interest rate hike came as the rupiah faced heavy pressure against the US dollar and investors monitored Indonesia’s economic resilience.

The central bank increased the benchmark rate by 50 basis points, exceeding the consensus expectation of a 25-basis-point rise among economists. The decision reflected Bank Indonesia’s growing concern over currency volatility, weakening investor confidence, and external risks linked to geopolitical tensions and global market uncertainty.

Economists said the aggressive move underlined the central bank’s determination to preserve financial stability while maintaining long-term economic growth prospects.

Stronger Monetary Tightening to Stabilize the Rupiah

Speaking during a televised interview on Kompas Bisnis, Permata Bank Chief Economist Josua Pardede described the policy move as a “bold preemptive step” designed to restore market confidence and ease pressure on the rupiah.

According to Josua, the rupiah previously weakened to around Rp17,700 per US dollar, while Indonesia’s bond and stock markets also suffered significant corrections. He argued that Bank Indonesia viewed the market turbulence as more than temporary volatility.

“The key issue here is credibility,” Josua said. “Bank Indonesia tightened monetary policy because pressure on the rupiah became severe.”

He added that the central bank had already implemented extensive stabilization measures before raising rates, including interventions in the foreign exchange market. Indonesia’s foreign exchange reserves fell by around US$10.3 billion during the first four months of 2026 as authorities tried to defend the currency.

The economist stressed that the Bank Indonesia interest rate hike should not harm economic growth. Instead, he argued that monetary stability remains essential for maintaining investor confidence and supporting long-term expansion.

Growth and Stability Must Move Together

Josua rejected the idea that policymakers must choose between economic growth and financial stability, saying both objectives remain interconnected.

He explained that investment remains one of the main drivers of Indonesia’s economy, and persistent market instability could weaken investor appetite despite strong headline growth figures. Indonesia’s economy expanded by 5.61% in the first quarter of 2026, according to data from BPS.

However, Josua noted that market sentiment continued to deteriorate even after BPS released the growth figures, indicating that investors cared more about policy credibility and future stability than short-term economic performance.

President Prabowo Subianto previously expressed optimism that Indonesia could achieve economic growth of 5.7%. But Josua warned that such targets would become difficult if the government relied too heavily on domestic consumption and public spending without strengthening investment confidence.

“Stability and growth must run side by side,” he said. “Without stability, investment confidence will not move forward.”

Bank Indonesia Governor Perry Warjiyo previously told lawmakers that the rupiah would likely remain within the government’s agreed macroeconomic assumption range of Rp16,200 to Rp16,800 per US dollar this year.

Geopolitical Risks and Fiscal Coordination Remain Key Concerns

Despite some optimism that the rupiah could recover in the second half of 2026, analysts warned that geopolitical risks, especially tensions in the Middle East, continue to create uncertainty for emerging markets.

Josua said external sentiment could shift rapidly depending on global developments, making it difficult to predict whether market conditions would stabilize permanently in the coming months.

He also emphasized that monetary policy alone would not sufficiently support the rupiah. According to him, stronger coordination between Bank Indonesia and the government’s fiscal authorities remains necessary to address broader structural concerns affecting investor sentiment.

The economist pointed to market concerns surrounding Indonesia’s capital market reforms, fiscal policy direction, and international assessments from institutions such as MSCI and credit rating agencies.

He criticized some members of Commission XI of the House of Representatives for placing excessive blame on Bank Indonesia while overlooking wider economic issues.

“Bank Indonesia already stands at the front line defending the rupiah,” Josua said, adding that policymakers should objectively examine the deeper causes behind market pressures.

The rupiah slightly strengthened to around Rp17,600 per US dollar following the central bank’s latest intervention measures, but analysts said sustained recovery would depend on coordinated fiscal and monetary responses in the coming months.