Two hikes in one month
Bank Indonesia (BI, Indonesia's central bank) raised its policy rate by 25 basis points to 5.75%. The deposit facility rose to 4.75% and the lending facility to 6.50%.
RRI reported that BI had already lifted the rate by 25 bp to 5.50% on 9 June. The 18 June move matched economists' expectations.
The stated reasons
BI gave two goals. The first is to strengthen the rupiah amid persistently high global uncertainty. The second is a pre-emptive step to keep 2026 and 2027 inflation within the 2.5% plus or minus 1 point target.
Governor Perry Warjiyo linked the volatility to the war in the Middle East. He said higher returns should act as an incentive for foreign portfolio inflows.
The 2.5% plus or minus 1 point corridor covers both 2026 and 2027, so the decision also looks ahead to next year.
Market reaction
The rupiah barely moved after the decision and traded near Rp 17,760 per US dollar. It had lost roughly 6.47% since the start of the year. The Jakarta Composite Index fell 1.40% that day.
BI also said it would reinforce macroprudential policy to support lending and tighten coordination with the government on financial stability.
The backdrop
The hikes came as the rupiah kept setting record lows. In early June it reached Rp 18,000 per dollar for the first time. Oil prices were climbing because of the war in the Middle East, and foreign investors were pulling money out of rupiah assets.
A higher rate makes rupiah bonds and deposits more attractive to foreigners. The downside is that loans for businesses and households also get more expensive. That is why BI paired the move with a pledge to support lending through macroprudential measures.