Bank Indonesia (BI) has further tightened its monetary policy by\nraising its benchmark interest rate. This move responds to significant\npressure on the rupiah exchange rate amid global volatility. During a\nWeekly Board of Governors Meeting on Tuesday, BI decided to raise the\nBI-Rate by 25 basis points to 5.50%. The Deposit Facility rate also rose\nby 25 bps to 4.50%, whilst the Lending Facility rate increased by 25 bps\nto 6.25%. BI Governor Perry Warjiyo stated that this hike is a follow-up\nmeasure to strengthen rupiah stabilisation from the impact of high\nglobal turmoil caused by the war in the Middle East. Furthermore, the\npolicy serves as a pre-emptive step to keep inflation within the 2.5%\u00b11%\ntarget range for 2026 and 2027. This hike continues BI\u2019s tightening\nafter the central bank previously raised the BI-Rate by 50 bps at the\nMonthly Board of Governors Meeting on 19-20 May 2026. Consequently, the\nbenchmark rate has risen by 75 bps in under a month. BI\u2019s aggressive\ntightening has indeed revived the previously lethargic rupiah. The\nrupiah exchange rate strengthened by 0.66% on Tuesday to Rp 18,050 per\nUS dollar.<\/p>\n
Looking at historical data, when Bank Indonesia tightens or raises\nits benchmark rate, several economic indicators are affected. However,\nthe impact is not always immediately visible in the same year due to a\nlagging effect. Generally, a rate hike makes the cost of funds in the\nfinancial system more expensive. This condition can then be transmitted\nto bank lending rates for consumer credit, working capital, and\ninvestment. When lending rates become more expensive, loan demand from\nbusinesses and the public tends to slow. Companies may postpone\nexpansion, whilst households may hold back on purchasing high-value\ngoods requiring financing. Therefore, the clearest impact of a rate hike\nis usually seen in bank credit growth and its effect on economic\nexpansion and inflation. In the context of inflation, raising interest\nrates serves as a monetary tool to help suppress price pressures.<\/p>\n
This condition was clearly evident in 2005. At that time, BI\naggressively raised the benchmark rate by 425 bps. The large increase\noccurred when Indonesia faced very high inflationary pressure, partly\ntriggered by a fuel price hike at the time. The impact was strongly felt\nin bank credit growth the following year. Credit growth, which still\nreached 28.44% in 2005, dropped sharply to just 12.70% in 2006. The rate\nof credit growth was thus more than halved within a year of the massive\nrate hike. Regarding its effect on inflation, the high interest rate\npolicy successfully suppressed price pressures. Inflation, which soared\nto 17.10% in 2005, fell significantly to 6.60% in 2006. This indicates\nthat monetary tightening was quite effective in curbing inflation.\nHowever, the consequence was still felt in the real economy. Indonesia\u2019s\neconomic growth also decelerated from 5.69% in 2005 to 5.49% in 2006.\nThe decline was not as deep as that of credit, but it still showed that\nthe rate hike restrained economic activity.<\/p>\n
A similar condition was seen in 2013. Back then, BI raised the\nbenchmark rate by 175 bps. That tightening occurred amid more complex\npressures: rising inflation, a weakening rupiah, and a sizable current\naccount deficit. Inflationary pressure in 2013 was also influenced by a\nsubsidised fuel price hike. Simultaneously, the rupiah was under\npressure as capital outflows from developing countries increased,\nfollowing changes in market expectations regarding US monetary policy.\nIn that year, bank credit growth was still fairly high at 21.39%.\nHowever, in the following year, credit growth fell sharply to 11.56% in\n2014, then slowed further to 10.12% in 2015. This means that within two\nyears of the 2013 rate hikes, the pace of bank credit nearly halved. The\nimpact on economic growth was also visible. Indonesia\u2019s economy, which\ngrew 5.56% in 2013, slowed to 5.01% in 2014 and fell again to 4.88% in\n2015. Meanwhile, inflation remained high in 2014 at 8.36%, almost the\nsame as the 8.38% recorded in 2013. However, inflation then dropped\nsignificantly to 3.35% in 2015. This demonstrates that the effect of\nrate hikes in curbing inflation also takes time.<\/p>\n
Subsequently, in 2018, BI again raised the benchmark rate by 175 bps.\nUnlike 2005, which was predominantly triggered by inflation, the 2018\nrate hikes were directed more at maintaining rupiah stability amid\nexternal pressures. At the time, global financial markets were\novershadowed by the US Federal Reserve\u2019s rate hikes. This condition\ndrove a strengthening US dollar and made dollar-based assets more\nattractive. Pressure was also exacerbated by rising trade war tensions\nbetween the United States and China. The situation triggered a risk-off\nsentiment in global markets, leading investors to exit emerging market\nassets and seek those considered safer. Under these conditions, the\nrupiah came under pressure along with other emerging market currencies.\nBI then raised rates to maintain the attractiveness of domestic\nfinancial assets, curb pressure on the rupiah, and strengthen\nIndonesia\u2019s external resilience. At that time, bank credit growth was\nstill at 11.72%. A year later, in 2019, credit growth slowed to\n6.08%.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/bi-aggressively-raises-rate-rupiah-rescued-economy-sacrificed-1781078196", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }