BI Rate Rises: Implications for Indonesia's Financial Markets

JAKARTA — Bank Indonesia’s decision to raise the policy rate, or the BI Rate, by 50 basis points to 5.25 percent is expected to exert short-term pressure on the domestic stock market. On the other hand, the policy is seen as potentially spurring foreign capital inflows into Indonesia’s government bonds.

Senior Market Analyst Nafan Aji Gusta of Mirae Asset Sekuritas notes that historically BI Rate hikes have often triggered short-term pressure on the Jakarta Composite Index (IHSG).

“Historically, BI Rate increases have often triggered minor corrections or short-term pressure on the IHSG,” he told Kompas.com.

First, the rise in the cost of funds makes investors anticipate lower profitability for issuers due to higher interest burdens.

Second, the valuation of shares is adjusted. Higher rates raise the expected returns for investors, so stock valuations, particularly those calculated using the discounted cash flow (DCF) method, tend to fall.

“The rise in the cost of capital. Investors anticipate lower profitability of issuers due to mounting interest burdens. Second, valuation adjustments, where higher rates raise the required rate of return, causing stock valuations (using the discounted cash flow method) to tend to fall,” he explained.

Nevertheless, Nafan notes that any correction in the stock market could be temporary if markets view the BI Rate increase as a pre-emptive move that helps stabilise the rupiah and curb inflation.

On the other hand, higher rates are seen as increasing the appeal of fixed-income instruments, especially Government Securities (SBN), for foreign investors.

BI Rate increases are typically followed by higher yields on government bonds. This tends to widen the yield spread between Indonesian bonds and US Treasuries, making domestic bonds more attractive as they offer higher yields with relatively measured risk.

“BI Rate increases are usually followed by higher yields on government bonds. When SBN yields rise, the spread between Indonesian bonds and US Treasuries widens,” he said.

This situation is viewed as capable of encouraging capital inflows into Indonesia’s bond market, while the stock market tends to experience volatility and rebalancing in the short term.

“This makes fixed-income instruments in Indonesia look more attractive because they offer measured risk with higher yields, thus triggering capital inflows into the bond market, while the stock market tends to experience volatility or rebalancing,” Nafan added.

Earlier, BI Governor Perry Warjiyo said the rate hike was intended to maintain rupiah stability amid high global uncertainty, driven mainly by geopolitical tensions in the Middle East.

“The BI Board of Governors meeting on 19-20 May 2026 decided to raise the BI-Rate by 50 basis points,” Perry said at a press conference following the BI RDG on Wednesday, 20 May 2026.

BI also announced increases in the deposit facility rate to 4.25 percent and the lending facility rate to 6 percent.