Room for BI-Rate hikes remains if rupiah exceeds Rp18,200, says economist

An economist at Bank Danamon, Hosianna Evalita Situmorang, has estimated that there remains room for further BI-Rate increases if the rupiah exchange rate remains under pressure above the level of Rp18,200 per US dollar and the current account deficit exceeds 1.5 percent of GDP. “Yes, increases could continue if the rupiah remains pressured above Rp18,200 (per US dollar) and the current account deficit widens beyond 1.5 percent of GDP,” Hosianna said when contacted in Jakarta on Tuesday. In general, Hosianna views Bank Indonesia’s (BI) decision to raise the BI-Rate during the Weekly Board of Governors Meeting on the same day as a positive and pre-emptive step to maintain exchange rate stability. She noted this is particularly relevant given that the rupiah had weakened by up to 8 percent against the US dollar on a year-to-date basis when the exchange rate touched Rp18,190 per US dollar, making this intervention crucial to mitigating the risk of imported inflation and its spillover effects. Hosianna also observed that the BI-Rate increase announced on Tuesday was immediately met with a positive market response, as reflected by a 0.7 percent strengthening of the rupiah to the level of Rp18,070 in the spot market by Tuesday afternoon. “Moreover, this policy is projected to boost the attractiveness of returns on domestic instruments,” Hosianna added. On Tuesday, through the Weekly Board of Governors Meeting, BI decided to raise the benchmark interest rate by 25 basis points, bringing it to a level of 5.5 percent. In line with this, the deposit facility and lending facility rates were also each raised by 25 bps to become 4.50 percent and 6.25 percent, respectively. BI had recently raised the BI-Rate by 50 bps during the Monthly Board of Governors Meeting on 19-20 May 2026. The increase in May 2026 marked the first adjustment after the benchmark rate had been held at 4.75 percent since September 2025. Throughout 2025, BI had previously cut the benchmark rate five times, totalling a reduction of 125 bps. BI is next scheduled to hold a Monthly Board of Governors Meeting on 17-18 June 2026. At the end of May 2026, foreign exchange reserves were recorded at 144.9 billion US dollars, a decline of 1.3 billion US dollars from the previous month, in line with government external debt payments and rupiah exchange rate stabilisation efforts. Over the last five months, foreign exchange reserves have shrunk by 11.6 billion US dollars from the position of 156.5 billion US dollars at the end of December 2025.