Bank Indonesia (BI) delivered an unscheduled 25 basis point interest rate hike to 5.50%, more than a week ahead of its next scheduled meeting, in an effort to stabilize the Indonesian rupiah after the currency hit a fresh record high of 18,190 against the US dollar [1]. This move follows a surprise 50 basis point hike on May 20, signaling BI's commitment to supporting the rupiah and preemptively addressing inflation risks for 2026 and 2027 within the government's target range [1].
According to Brown Brothers Harriman’s Elias Haddad, the USD/IDR exchange rate retreated sharply following the announcement, reflecting immediate market reaction to the policy tightening [1]. Haddad notes that the rupiah is currently 10% undervalued relative to its real effective exchange rate trend, marking the most significant undervaluation since 2009 [1].
Haddad expects that BI’s rate hikes, combined with ongoing foreign exchange intervention, will help limit further weakness in the rupiah. However, he cautions that the currency is unlikely to correct its significant undervaluation until the prevailing energy shock subsides [1].
BI stated that the rate increase is a follow-up measure to strengthen the stabilization of the rupiah exchange rate and a preemptive step to keep inflation within the government’s target range in the coming years [1].
CONCLUSION
Bank Indonesia's unexpected rate hike and continued FX intervention have provided immediate support to the rupiah, which remains significantly undervalued. While these measures may limit further currency weakness, analysts suggest a full recovery is unlikely until external energy shocks diminish.