A country’s economic sector is always dynamic, often requiring governments and monetary authorities to implement policies that are not popular.
The decisions taken may not be welcomed by the public, businesses, or even the market itself. However, it is precisely at times like these that the quality of economic governance is tested. Not when conditions are calm, but when pressure comes simultaneously from various directions.
Bank Indonesia’s decision on June 9, 2026, to once again raise its benchmark interest rate to 5.5 percent is one example of a policy born out of such circumstances.
Within three months, the BI Rate had increased by 75 basis points. From 4.75 percent at the beginning of the year, it rose to 5.25 percent in May and then increased again to 5.5 percent in June.
The move was not taken suddenly but was the result of careful consideration. The rupiah remained above IDR 18,000 per US dollar, while Indonesia’s foreign exchange reserves in May 2026 declined to USD 144.9 billion, shrinking by nearly USD 3 billion compared to the previous month.
At the same time, Bank Indonesia Governor Perry Warjiyo acknowledged that the movement of the rupiah exchange rate was weaker than previously projected.
This statement is important because it shows that the pressures facing the national economy were not entirely in line with initial projections.
Under such circumstances, the central bank must act quickly to maintain stability. One of the most direct instruments available is raising interest rates.
In theory, higher interest rates have a clear objective. When returns on rupiah-denominated financial assets increase, foreign capital has a greater incentive to enter or remain in the country.
Currently, Bank Indonesia Rupiah Securities (SRBI) with a 12-month tenor offer yields above 6.5 percent, a level considered competitive compared to several other emerging economies.
However, every economic policy comes with consequences. There is no free lunch in economics. When interest rates rise to strengthen the attractiveness of financial assets, borrowing costs for households and businesses also increase.
For households with floating-rate mortgages, higher interest rates mean larger monthly installments in the months ahead.
For small and medium-sized enterprises (SMEs) that rely on working capital loans, operating costs increase precisely when profit margins are under pressure.
Businesses that had previously planned expansion also tend to become more cautious because financing costs become more expensive.
This is where the policy dilemma emerges. Exchange rate stability is important, but efforts to maintain that stability have the potential to slow economic growth.
Economic Growth
Several economists estimate that credit growth, which was still around 10 percent in April 2026, may slow to approximately 8 percent. A slowdown in credit growth will inevitably affect overall economic activity.
The economic growth target of 5.4 percent that had previously been set is now viewed by some analysts as overly optimistic.
Various projections now place economic growth within the range of 4.9 to 5.1 percent over the coming quarters.
At first glance, the difference may seem small. However, in economic reality, a one-percentage-point difference in growth can mean thousands of jobs not created and reduced opportunities for income growth for millions of Indonesian families.
Therefore, discussions about interest rates should not be understood merely as technical matters taking place in central bank meeting rooms. This policy has real implications that affect the smallest unit of the economy: households.
On the other hand, there are also strong arguments supporting the increase in the BI Rate. If the rupiah continues to weaken, the prices of imported goods will rise.
Indonesia still depends on various imported components for both production and consumption sectors. Prolonged rupiah depreciation has the potential to push inflation higher.
Inflation in May 2026 reached 3.08 percent. If the rupiah continues to weaken and global oil prices remain high, inflationary pressures could become even greater.
In such circumstances, fixed-income households become the most vulnerable group. They do not have hedging instruments to protect their purchasing power from rising prices of goods and services.
That is why some economists view higher interest rates as a bitter medicine that nevertheless needs to be taken.
The short-term impact may feel uncomfortable, but greater risks can be avoided if price stability is maintained.
Nevertheless, accepting that logic does not mean ending the discussion about the deeper underlying issues.
Economic Stability
Three interest-rate increases within a short period send a signal that the burden of economic stabilization currently rests too heavily on the central bank.
Economic stability should be the result of the combined efforts of various policy instruments. When all attention is directed toward the BI Rate, questions arise regarding the extent to which fiscal policy is also playing its role.
What is needed is not merely ceremonial coordination between fiscal and monetary authorities, but concrete actions that markets can interpret as credible signals.
Consolidation of government spending, fiscal discipline, and convincing deficit management will help strengthen investor confidence and reduce pressure on the exchange rate.
Markets do not only pay attention to interest rates. They also observe fiscal health, government policy direction, and the country’s ability to maintain long-term economic sustainability.
When budget deficits increase and foreign exchange reserves decline, higher interest rates may serve as a temporary pressure-relief mechanism, but they may not fully resolve the problem.
Interestingly, Bank Indonesia’s latest decision reflects a more cautious approach. While the increase in May was 50 basis points, this time it was only 25 basis points.
This step can be interpreted as recognition that the domestic economy also has a tolerance limit for high interest rates.
Just as in medicine, an excessive dose can produce side effects greater than its benefits.
Therefore, the decision to set the BI Rate at 5.5 percent teaches an important lesson that is often overlooked in economic discussions: the rupiah exchange rate is not merely a number displayed on foreign exchange trading screens.
The rupiah reflects confidence. Confidence among investors in the economic outlook, confidence among the public in price stability, and confidence that all policy instruments are working in harmony toward the same objective.
Monetary policy can help maintain that confidence. However, strong confidence will not emerge from a single institution alone. It grows through close coordination, policy consistency, and the willingness of all stakeholders to confront economic realities openly.
Therefore, the most important question after the BI Rate increase is not only whether the rupiah will remain stable in the coming weeks, but whether the foundation of confidence that supports that stability is also becoming stronger for the long term.
Source:
• ANTARA – BI Rate 5.5 Percent and the Lesson of Maintaining Economic Confidence
