Building Resilience Behind the BI Rate Rise

Bank Indonesia has officially raised the policy rate (BI Rate) by 50 basis points to 5.25 percent at the Board of Governors’ Meeting (RDG) on 19–20 May 2026. The rise is also accompanied by a Deposit Facility rate of 4.25 percent and a Lending Facility rate of 6.25 percent. The 50 basis point BI Rate increase was somewhat beyond expectations, as most observers predicted a 25 basis point rise.

The decision to raise the BI Rate to 5.25 percent aims to strengthen the stability of the rupiah’s exchange rate in the face of worsening global economic conditions stemming from the protracted escalation of the conflict in the Middle East, and to keep inflation within the target range of 2.5 percent to 1 per cent.

Historically, Bank Indonesia tends to raise the BI Rate when inflation is high. However, this time the decision appears more driven by the rupiah’s weakness. As the rupiah loses steam in the market, Bank Indonesia must raise the BI Rate to prevent further depreciation. The May 2026 RDG decision should be understood as the best option among the worst options available.

Dampak Kenaikkan BI-Rate

With the policy rate raised, Bank Indonesia hopes to attract investors back to investing in rupiah assets. When the rupiah is weak, foreign investors typically withdraw their funds from government securities (SBN) to safer assets. This capital outflow will worsen pressure on the rupiah. Citing data from the Directorate General of Financing Risk Management of the Ministry of Finance, up to April 2026 foreign investors registered net sales of Rp 11.82 trillion in the government securities market. In the same period, stock-market investors also sold net Rp 49.87 trillion. This means total foreign capital outflows of Rp 61.69 trillion.

The continuing capital outflows will obviously have negative effects on Indonesia’s economy. But raising the policy rate is not without risk. When Bank Indonesia raises rates to curb inflation and maintain rupiah stability, the impact is immediate: loan costs and repayments rise, the stock market becomes volatile, and business development may be hampered. In broad terms, the domino effects when the policy rate is raised are:

First, the burden of borrowing and consumer credit automatically increases. The decision to raise the policy rate will signal commercial banks to adjust product rates. When the BI Rate rises by 50 basis points to 5.25 percent, mortgage loans (KPR), motor vehicle loans (KKB), and unsecured loans (KTA) will rise. For those with floating-rate loans, monthly instalments become heavier. This, in turn, reduces households’ purchasing power and suppresses aggregate household consumption.

Second, the prospects for firms to expand will certainly be hampered. For firms at any level, the cost of capital from bank lending to support business expansion will be higher. Firms reliant on bank lending to raise production capacity, build factories, add fleets, or develop product innovation will reconsider when loan rates rise. Increased operating costs due to higher credit interest can lead to efficiency. In the worst case, the impact of higher loan rates risks suppressing employment absorption and could even trigger redundancies due to higher operating costs.

Third, although higher policy rates can contain capital outflows, stock-market risks are likely to arise. The decision to raise the policy rate indeed narrows the yield gap with advanced government bonds (such as US Treasuries), and this can influence investors when allocating capital to Indonesia. This step can help prevent capital outflows that disturb national financial conditions. However, for the Indonesia Stock Exchange, this phenomenon often triggers short-term volatility. Investors tend to move funds from high-risk instruments like equities to safer instruments such as deposits, retail government securities (SBN), or fixed-income mutual funds.

Resilience

The decision to raise the BI Rate has undoubtedly been weighed carefully, and it is undertaken as a measured pre-emptive step to respond to the dynamics of global uncertainty. Bank Indonesia has an interest in safeguarding the exchange rate and rupiah stability. Although this move will create an additional burden on borrowing, the decision is expected to shield the rupiah from deeper depreciation.

The decision to raise the policy rate is not solely a technical instrument to control demand and capital outflows. It is also an effort to restore confidence. By raising the policy rate, Bank Indonesia wants to declare that the rupiah’s position will be safeguarded, inflation expectations will not be left to run loose, and monetary authorities have not lost control.

The government itself is not unaware of the risks. It may be true that raising the policy rate can curb rupiah depreciation, but at the same time, in fact also m