Researcher urges BI Rate rise to safeguard monetary credibility

Great Institute economist Ani Asriyah has urged Bank Indonesia (BI) to raise the BI Rate by 25 basis points, from 4.75 percent to 5.00 percent, as a corrective step to safeguard the credibility of monetary policy and curb rupiah depreciation. ‘BI needs to show a firm signal that exchange-rate stability remains a priority. In the current situation, a 25-basis-point rise is a prudent corrective step to curb rupiah depreciation from developing into a dislocation that would be more costly for the economy,’ she said in a statement in Jakarta on Tuesday. She said the policy rate had remained at 4.75 percent since September 2025, but pressures on the rupiah have not eased. In such a scenario, foreign exchange interventions alone are no longer sufficient, and any delay would only magnify stabilization costs that must ultimately be borne by the national economy. She also noted that pressures on the rupiah cannot be detached from global dynamics, particularly the Federal Reserve’s monetary policy which remains committed to a higher-for-longer approach. This condition makes the interest rate differential between advanced economies and developing ones a crucial factor in determining the direction of global capital flows. This phenomenon, Ani continued, reflects a dilemma in which monetary authorities must balance exchange-rate stability, independence of monetary policy, and capital-flow openness. ‘Indonesia, as part of emerging markets, faces greater pressures due to sensitivity to shifts in global sentiment and volatility of capital flows,’ she said. According to Ani, a 25 basis point increase in the policy rate has a dual function. On one hand, in terms of monetary transmission, the rise would raise yields on domestic financial instruments, potentially attracting back foreign capital flows into Indonesia’s financial markets. On the other hand, importantly, this policy would act as a policy signal that can shape market expectations. ‘In times of high uncertainty, expectations often become the main determinant of exchange-rate movements, so small but credible steps can yield significant impacts in the short term,’ she added. Nevertheless, there are several aspects for the government to watch, especially since a rise in interest rates can slow investment and credit-based consumption in the short term. ‘But in this scenario where the exchange rate is already deeply pressured, the cost of inaction could be much higher.’ ‘A continued weakening of the rupiah risks fuelling imported inflation, exacerbating foreign-currency debt burdens, and worsening investors’ perception of Indonesia’s risk,’ added Ani. In the Great Institute’s view, a 25 basis point BI Rate increase would yield at least four benefits. First, it would send a clear signal that Bank Indonesia remains independent and credible in safeguarding rupiah stability. Second, it would improve the attractiveness of domestic financial asset yields to help support portfolio inflows. Third, it would reduce the burden of foreign exchange interventions that have been used to dampen exchange-rate pressures. And fourth, it would curb the risk of rupiah depreciation feeding into inflation and the domestic financial markets. This tightening should not be read as a total reversal of policy, as Bank Indonesia can still maintain a macroprudential, accommodative stance to support credit and the real sector. The Great Institute also argues that Bank Indonesia’s task today is not merely to prevent deeper rupiah volatility, but to ensure markets see the central bank as credible and responsive. ‘In that context, a 25 basis-point BI Rate increase is the right, measured, and urgent step to mitigate rupiah depreciation and safeguard macroeconomic stability,’ added Ani.