BI Rate Held Steady: A Cautious Step That Could Backfire

The government still needs to improve economic fundamentals, policy governance and law enforcement.

JAKARTA, KOMPAS — Bank Indonesia’s decision to keep its benchmark interest rate at 5.75 per cent has been appreciated as a cautious move that could attract capital inflows. However, holding the rate at such a high level still carries risks and wide-ranging consequences.

“Bank Indonesia’s decision to maintain the BI Rate at 5.75 per cent is a prudent and measured step amid once again rising global uncertainty,” said Shinta Kamdani, Chairwoman of the Indonesian Employers Association (Apindo), when contacted on Thursday (23 July 2026).

Previously, over the span of a month, BI had adopted rather aggressive interest rate policy. On 19-20 May 2026, BI raised its benchmark rate by 50 basis points from 4.75 per cent to 5.25 per cent.

Subsequently, on 9 June 2026, BI raised the rate by a further 25 basis points to 5.50 per cent. This step was taken outside the monthly schedule amid a sharp depreciation of the rupiah. On 17-18 June 2026, BI raised the benchmark rate again to 5.75 per cent.

At its monthly Governors’ Board Meeting (RDG) on 21-22 July 2026, in addition to holding the benchmark rate, BI also left the deposit facility and lending facility rates unchanged, at 25 basis points lower and higher respectively, at 4.75 per cent and 6.5 per cent.

BI takes the view that rising global economic and financial market uncertainty requires strengthened policy responses as well as fiscal-monetary synergy to reinforce external resilience, maintain stability and drive domestic economic growth.

According to Shinta, the decision to hold the rate gives the real sector some breathing room, particularly given that BI had already raised the benchmark rate fairly aggressively beforehand.

In the global context, the re-escalation of conflict in the Middle East has pushed oil prices back above 90 US dollars per barrel. In addition, expectations of US central bank policy — the Federal Reserve remaining higher for longer — continue to weigh on financial markets and exchange rates in developing countries, including Indonesia.

Given these conditions, Shinta said, the business community still regards macroeconomic stability as an essential prerequisite for the continuity of investment and business activity. At the same time, however, that stability needs to be balanced with sufficient room for the real sector to keep growing and expanding.

Although the decision to hold the BI Rate sent a positive signal by not adding new pressure on business financing, Shinta acknowledged that the challenges facing businesses have not fully diminished.

Amid the re-escalation of geopolitical dynamics, the business community still faces multiplier effects, such as high production costs due to rising energy and raw material prices, exchange rate volatility, and various high-cost economy components at the domestic level.

“On the other hand, the impact of the interest rate hikes in recent months is also beginning to be felt through higher capital costs and lending rates, particularly for companies that rely on bank financing for working capital or investment,” she said.

Therefore, Shinta said, the business community views stability and growth not as two opposing objectives, but as goals that must advance hand in hand.

Maintained macroeconomic stability will boost market confidence and provide certainty for businesses. The continuity of investment and productive sector activity is an important factor in maintaining economic growth momentum, strengthening competitiveness and creating jobs.

She also assessed that the main challenge today is no longer merely the level of interest rates, but how to maintain a balance between macroeconomic stability and real sector growth momentum. Businesses need stability, but they also require a financing climate that remains conducive so that investment, business expansion and job creation can continue.

“Going forward, Apindo hopes BI will continue to prioritise a balanced, data-dependent policy mix so that exchange rate stability is maintained without excessively suppressing the productive sector. In addition, coordination between monetary and fiscal policy also needs to be continually strengthened,” she said.

The government, too, welcomed Bank Indonesia’s move to hold the BI Rate. Coordinating Minister for Economic Affairs Airlangga Hartarto noted that higher interest rates would still affect the real sector.

“With the rate held, hopefully the real sector can keep moving. Because raising rates is essentially like pressing on the brakes,” he told journalists at the Presidential Palace complex in Jakarta on Wednesday (22 July 2026).

Although the rupiah strengthened only slightly, Airlangga said economic growth and credit growth are more important. By keeping the rate at 5.75 per cent, credit growth is expected to be supported.

Contacted separately, University of Indonesia economist Kiki Veriko viewed the decision to hold the rate as a sign that BI is fairly confident capital inflows are already occurring, although perhaps not from long-term foreign direct investment (FDI).

So far, Kiki said, even though the rate was first raised in May and then again in the following two months, the rupiah continued to weaken. However, once government policy in the real sector, including law enforcement actions, met market expectations, the rupiah began to strengthen slightly.

According to him, the current stabilisation of the rupiah depends heavily on investor expectations. Moreover, export performance appears to be declining, with nickel demand no longer as high as before, and palm oil increasingly being absorbed domestically for B50 production. In these conditions, he said, the government must genuinely pay attention to market expectations to ensure foreign exchange continues to flow in.

He also cautioned that although holding the rate at 5.75 per cent can safeguard capital inflows, risks remain. This is because before investing, foreign investors not only compare dollar and rupiah interest rates, but also weigh depreciation expectations. If depreciation deepens, the rupiah rate would need to be raised again to remain attractive to investors.

The problem is that high interest rates should not be maintained for too long. Doing so can drive up imported inflation, such as the raw materials and machinery needed by industry. Worse still, with the rupiah still weak, production costs climb even higher.

“When raw materials and machinery become more expensive, production costs rise further, interest rates go up too, and the business ecosystem becomes unattractive — everything becomes expensive. That’s why raising interest rates really cannot go on too long or go too high, because in the end it’s like hitting yourself,” Kiki said.

Rather than keeping the BI Rate high, the government should instead improve fiscal and general governance. Such fundamental reforms would restore investor confidence, and the rupiah would naturally stabilise as funds flow in.

Conversely, recent government steps have added reasons for investors to distrust the Indonesian economy. Kiki cited President Prabowo Subianto’s decision to appoint his close ally and Gerindra Party politician Sudaryono as Head of the National Nutrition Agency (BGN), responsible for the Free Nutritious Meals (MBG) programme.

Kiki recalled that when Thomas Djiwandono, Prabowo’s nephew, was moved from the post of Deputy Finance Minister to Deputy Governor of BI, the market was also shaken. “So the market wants the government to be run by professionals, not by political parties,” he said.

Separately, Executive Director of the Institute for Development of Economics and Finance Esther Sri Astuti also judged that holding rates high is unavoidable if capital is not to flee Indonesia.

This is what the government is currently attempting by establishing the Indonesia International Financial Centre (PFII). However, the PFII is advised not to offer blanket 50-year tax exemption incentives. Tax facilities should be clustered over shorter timeframes, and incentives could be granted in a measured and limited way to sectors that are the focus of development.

Echoing Kiki, Esther cautioned that the government should instead stabilise the rupiah by improving the investment climate and boosting exports to increase foreign exchange earnings. This, however, requires coherent and integrated policy between BI and the ministries.

Fiscal policy must be managed well so that government budgets are used only for productive purposes. In addition, government rules and policies affecting the business community need to be more consistent.