Indonesia’s central bank raises lending rate unexpectedly to 5.5%, aiming to stabilise the rupiah amid Middle East war turmoil and market sell-offs.
JAKARTA: Indonesia’s central bank unexpectedly raised its lending rate on Tuesday to bolster the rupiah, which recovered slightly as the stock market also rallied.
Bank Indonesia announced a 25-basis-point interest rate hike to 5.5% more than a week ahead of its scheduled monetary policy meeting. It followed another increase of a higher-than-expected 50 points three weeks ago.
READ MORE: Rupiah falls to record low past 18,000 against US dollar
Jakarta’s main stock index was up more than 7% after the rate rise, while the rupiah fell back under 18,000 to the US dollar for the first time in days.
The rupiah has taken a battering on the back of surging energy costs caused by the Middle East war, tumbling more than 7% this year.
It has been Asia’s worst-performing currency, according to financial outlet Bloomberg News.
Indonesia is a net oil importer but the government has insisted on leaving heavily subsidised fuel prices unchanged despite struggling with high costs.
The rupiah fell to a record low below 18,000 last week, and the Southeast Asian giant’s stock market has lost about a third of its value in 2026.
The central bank said on Tuesday it was raising its base interest rate “to strengthen the stability of the rupiah exchange rate against the impact of high global volatility due to the war in the Middle East”.
It described it as a “preemptive measure to maintain inflation in 2026 and 2027 within the government’s target range of 2.5 +/- 1.0%”.
The hike “is also intended to increase returns and attract foreign portfolio investment inflows into Indonesia”, the bank said.
– ‘Resource nationalism’ –
The central bank has been unable to halt the exchange rate rout despite recently tightening the rules for dollar purchases.
Parliament passed a bill last week expanding the bank’s mandate to include responsibility for economic growth. The bill also increased lawmakers’ oversight of the institution, raising fears for the bank’s independence.
President Prabowo Subianto announced commodity export controls last month that sent a tremor through the markets, with investors concerned over “resource nationalism” in the world’s largest palm oil producer.
Indonesia’s trade surplus narrowed to just $89 million in April from $3.3 billion a month before, according to government data.
Capital Economics described Tuesday’s rate hike as an “emergency move” unlikely to have the desired outcome.
“Placing the currency on a firmer footing requires… the Prabowo administration to shift away from its populist and interventionist policy agenda,” the research group said in a statement.
If the currency reverses Tuesday’s early gains, Bank Indonesia could well announce another rate hike at its scheduled meeting next week, the statement added.
“Rate hikes are merely acting as a sticking plaster. Ultimately what’s needed is a clear shift in direction by the government towards more investor-friendly policymaking.”
