BI Advised to Adopt Hawkish Stance and Raise Interest Rates
Trimegah Sekuritas Indonesia’s Chief Economist, Fakhrul Fulvian, has assessed that Bank Indonesia (BI) needs to adopt a more hawkish stance by pre-emptively raising the benchmark interest rate amidst Rupiah pressure, which has touched Rp17,600 per US Dollar.
According to Fulvian, current conditions are no longer solely influenced by external factors such as global oil prices or the US Federal Reserve’s interest rate policies. Instead, the emerging pressure is beginning to affect more fundamental aspects, namely the credibility of Indonesia’s macroeconomic policy anchors. In such a situation, the central bank must play a role not only in controlling inflation but also in maintaining confidence in the overall policy direction.
“When market participants begin to doubt the floor of Rupiah depreciation, inflation targets, and the coordination between fiscal and monetary policies, stabilisation efforts could potentially require increasingly higher costs in the future. BI must be hawkish,” he stated in a briefing received on Monday.
He noted that the absence of sufficiently firm adjustment signals, particularly regarding domestic energy prices, the direction of subsidies, and fiscal calibration, has caused adjustment pressures to shift almost entirely onto the Rupiah exchange rate. Under the post-1998 open capital regime, this condition could trigger the ‘Dornbusch overshooting’ phenomenon, where currency values fluctuate extremely.
Therefore, Fulvian suggests that Bank Indonesia should return to the classic stabilisation approach successfully used during previous periods of external pressure: ‘Pre-emptive, Front Loading, and Ahead the Curve’. In the current context, this step may require a 50 basis point increase in the BI Rate.
“This interest rate hike is not because the economy is collapsing or inflation is already high. Rather, it is necessary so that we do not pay a higher price in the future due to the loss of an expectation anchor,” he said. He reminded that Indonesia took similar steps in 201 recognising that BI raised rates aggressively even though domestic inflation was relatively controlled, in order to maintain Rupiah stability and restore market confidence before pressures intensified.
He also assessed that a BI Rate hike does not necessarily mean excessive tightening on the real economy. Indonesia currently possesses much more flexible macroprudential instruments compared to previous tightening cycles. With coordination alongside the Financial Services Authority (OJK), credit distribution to priority sectors can still be maintained through liquidity incentives and more targeted sectoral policies.
“This is not an anti-growth policy. This is an effort to maintain macroeconomic stability so that growth is not further damaged by imported inflation, balance of payments pressure, and a surge in risk premiums,” Fulvian emphasised.
On the financial market side, a hawkish move by Bank Indonesia is seen as helping the normalisation of the domestic market structure. The current condition shows distortions between short-term sterilisation instruments, such as SRBI, and the long-term bond market, causing fund flows to concentrate on short-duration instruments. A healthier and steeper yield curve is required to prevent future instability.
He estimates that if the policy response is swift and credible, the Rupiah’s overshooting phase could reverse into a relatively sharp appreciation, with projections of the Rupiah returning to the range of Rp16,800 per US Dollar.
Beyond monetary policy, Fulvian noted that strengthening government fiscal policy coordination is vital, including clarity on energy subsidies, bond issuance strategies, and diversifying state financing sources. He also emphasised that Indonesia should expand funding sources beyond the US Dollar, such as RMB-based funding or Dim Sum Bonds, to adapt to the fragmenting global financial landscape.