Economist: BI-Rate hike makes rupiah assets more attractive

PermataBank Chief Economist Josua Pardede stated that the BI-Rate hike will have a positive impact in the short term as it makes rupiah assets more attractive and can withstand selling pressure on the rupiah. “This policy can also dampen speculation on rupiah weakening, especially if followed by increased attractiveness of Bank Indonesia Rupiah Securities (SRBI), lower hedging costs, and measured foreign exchange intervention,” Josua said. However, he noted that its effectiveness will not be automatic, as the rupiah will only become more stable if the market sees that the interest rate increase is also supported by clear policy communication, state budget (APBN) discipline, and consistent coordination between the government and BI. “If the source of investor concerns remains, the rupiah strengthening effect could be merely temporary,” Josua said. According to him, BI wants to send a strong signal that the rupiah’s depreciation can no longer be adequately handled solely through foreign exchange market operations, but needs to be reinforced with higher rupiah yields so that foreign capital flows return. He stated the move was appropriate under current conditions, but is more of a defensive step to prevent greater damage, not a primary cure for all the rupiah’s problems. When the rupiah has breached an important psychological level, global pressures remain high, energy prices risk rising, and foreign investors are still cautious, he said a firm response is indeed necessary. “Allowing the rupiah to weaken too far could actually trigger rising inflation, worsen market confidence, and increase financing costs for both the government and the private sector,” Josua said. On the other hand, he reminded that the government must also help strengthen market confidence through fiscal discipline, more selective spending, regulatory certainty, strengthening state revenues, as well as calmer, data-based communication. “If the fiscal and regulatory side does not help improve investor perception, then BI will continue to be forced to work harder with increasingly expensive stabilisation costs,” Josua said. Josua concluded that the BI-Rate hike was a necessary and rational step to withstand rupiah pressure, keep inflation in check, and attract back foreign funds, but it needs to be treated as a bridge to restore confidence, not as a permanent solution. “The rupiah will be more stable if the interest rate increase is accompanied by fiscal credibility, policy certainty, and reforms that improve the investment climate. Without that, rupiah stabilisation will only be temporary and the costs to the economy could become larger,” Josua explained. Regarding its impact on the national economy, he explained it is two-sided. On one hand, the BI-Rate hike helps maintain exchange rate stability, stem the rise in imported goods prices, and protect people’s purchasing power from higher inflation risks. “On the other hand, bank funding costs could rise, loan interest rates could become harder to lower, and the business world will be more cautious about expanding,” Josua said. He explained that interest-sensitive sectors such as property, automotive, consumer financing, and businesses that heavily use short-term loans could feel the pressure more quickly. “Therefore, this policy indeed helps stability, but can add a burden to economic growth if it lasts too long,” Josua said.