An increase in the benchmark interest rate always carries economic consequences. On one hand, higher interest rates can strengthen market confidence and support exchange rate stability. On the other hand, they also increase borrowing costs for businesses and households. Therefore, when Bank Indonesia raised the BI Rate to 5.75 percent, the more important question was no longer whether the policy was favorable or unfavorable, but how it would affect the national economy and whether its short-term costs were smaller than the risks of allowing the rupiah to remain under prolonged pressure.
The first impact of the policy is reflected in financial markets. Higher interest rates increase the attractiveness of rupiah-denominated assets, including government securities (SBN), Bank Indonesia Rupiah Securities (SRBI), and money market instruments. At a time when the US dollar is strengthening and global uncertainty encourages investors to seek safer assets, higher returns provide an incentive for foreign investors to maintain or increase their exposure to Indonesia. Although yield differentials are not the sole determinant of investment decisions, controlled inflation and central bank credibility remain essential factors in maintaining investor confidence.
The policy also serves as an effort to stabilize the exchange rate. A significant depreciation of the rupiah increases the cost of importing strategic goods, including industrial raw materials, energy, pharmaceuticals, machinery, fertilizers, aviation fuel, and logistics services. For households, these pressures appear gradually through higher consumer prices. For businesses, a weaker currency raises production costs, reduces profit margins, and increases the cost of foreign exchange hedging. By raising the BI Rate, Bank Indonesia aims to prevent exchange rate pressures from developing into broader imported inflation.
At the same time, higher interest rates inevitably increase financing costs. Banks tend to become more cautious in extending credit, businesses may postpone expansion plans, and households may reconsider mortgage applications, vehicle loans, and other forms of consumer financing. Interest-sensitive sectors such as property, automotive, construction, durable goods retail, and many small and medium-sized enterprises are expected to experience these effects more quickly. Nevertheless, these short-term costs must be weighed against the potentially greater consequences of allowing the rupiah to weaken further, including heightened market uncertainty, deeper currency depreciation, and more persistent inflation.
Higher interest rates also affect fiscal management and the bond market. Increased borrowing costs may raise the expense of issuing new government debt while reducing the market value of existing bonds. Consequently, the government must manage public financing more prudently. At the same time, exchange rate stability helps preserve fiscal credibility because excessive currency depreciation can increase energy subsidy costs, foreign debt servicing obligations, and perceptions of sovereign risk. In this context, Bank Indonesia and the government play complementary roles by maintaining monetary stability while ensuring that fiscal policy remains productive and efficient.
The business sector also experiences important consequences. Companies that generate revenue in rupiah while holding liabilities in US dollars benefit from a more stable exchange rate. Conversely, firms relying on floating-rate borrowing face higher financing costs. This environment underscores the importance of stronger risk management through foreign exchange hedging, improved import contract management, inventory planning, and financing strategies. Exporters should also recognize that a weaker rupiah does not automatically improve competitiveness when production continues to depend on imported raw materials, machinery, technology, energy, and US dollar financing.
Some observers argue that higher interest rates could slow economic growth by reducing credit expansion, consumption, and investment. This concern is understandable because sustainable growth requires affordable financing. However, allowing the rupiah to weaken without an adequate policy response could also undermine growth by increasing uncertainty, raising risk premiums, and delaying investment and consumption decisions. Under such circumstances, stability should not be viewed as the opposite of growth, but rather as a necessary foundation for sustainable economic expansion.
For this reason, the effectiveness of the BI Rate increase depends largely on the broader policy mix. Monetary policy should be complemented by accommodative macroprudential measures, sufficient banking liquidity, continued development of digital payment systems, sound foreign exchange policies, and productive government spending. Fiscal certainty, faster implementation of high-quality public expenditure, stronger export performance, and consistent industrial policies are equally important in supporting economic resilience.
Ultimately, higher interest rates are not an objective in themselves but an instrument for maintaining stability during periods of elevated global uncertainty. The additional time gained through monetary tightening should be used to strengthen economic fundamentals by improving foreign exchange reserves, increasing industrial productivity, enhancing food and energy security, and maintaining investor confidence. Businesses also need to use this period to strengthen risk management and improve competitiveness.
Although the higher BI Rate places pressure on several sectors of the economy, it also contributes to maintaining rupiah stability, containing imported inflation, supporting capital inflows, and demonstrating that economic authorities remain responsive to global challenges. Over the longer term, the success of this policy will be measured by its ability to prevent larger economic costs while preserving sustainable national growth.
Sources: Jernih.co – Does the BI Rate Suppress Pro-Growth Policies?
