In a surprising move, Bank Indonesia increased its 7-day reverse repo rate from 5.25% to 5.5%, contrary to economists' expectations of no change. This decision aims to bolster the rupiah, which has recently hit record lows against the dollar, and to keep inflation within the government's target range of 1.5% to 3.5% for 2026 and 2027.
The central bank noted that the depreciation of the rupiah has been exacerbated by foreign portfolio investment outflows, with the Jakarta Composite index dropping over 35% year-to-date. Despite previous interventions, including a significant 50 basis points hike in May and forex market interventions, the rupiah continued to weaken, reaching 18,190 against the dollar on June 8.
The latest inflation reading of 3.08% in May, higher than both the previous month and analysts' expectations, adds pressure on the central bank to act. Following the rate hike, the rupiah showed some recovery, strengthening 0.66% to 18,050.
Analysts from DBS Group Research anticipate that the central bank will continue to prioritize financial market stability and may implement further rate increases to defend the currency