Indonesia hikes rates in surprise move as rupiah hits record low, forex reserves fall to 2-year low

Bank Indonesia raised its benchmark interest rate for the second consecutive month, as a prolonged Middle East conflict drives up global oil prices and the rupiah weakens to record lows against the US dollar.

The repeated interventions in the foreign exchange market, however, have pushed Indonesia's foreign reserves to their lowest level in two years.

Bank Indonesia raised its seven-day reverse repurchase rate — the benchmark interest rate — by 25 basis points to 5.5% from 5.25% on Tuesday, local time.

The move came as a surprise. At its regular policy meeting on May 20, the central bank had already delivered an outsized 50-basis-point hike, but Tuesday's decision was an unscheduled, off-cycle increase.

"The rupiah exchange rate has weakened more than expected," Bank Indonesia said in a statement, adding that an "off-cycle rate hike was necessary."

The rupiah has repeatedly set record lows against the dollar since late March. On Monday, it touched 18,190 rupiah per dollar — roughly 1,524 won — marking yet another all-time low.

After Tuesday's rate hike, the currency pulled back somewhat to 18,085 rupiah per dollar, or about 1,517 won.

The rupiah has lost more than 7.5 percent of its value this year amid surging global oil prices driven by the prolonged Middle East war, making it Asia's worst-performing currency — outpacing even the Indian rupee, which has fallen around 6 percent.

Indonesia's foreign reserves fell by $1.3 billion (about 1.9 trillion won) last month to $144.9 billion (about 220.4 trillion won), the lowest level since 2024. Reserves have declined for five consecutive months this year — the longest stretch of declines since 2018.

The cumulative drawdown over that period totals approximately $11.6 billion (about 17.6 trillion won), reflecting the authorities' repeated interventions in the foreign exchange market to defend the rupiah.

Bank Indonesia has acknowledged that the decline in reserves stems from government external debt repayments and measures to stabilize the rupiah amid volatile global financial markets.

Indonesia passes law expanding Bank Indonesia's mandate

Indonesia's parliament recently passed legislation that significantly expands Bank Indonesia's mandate to include promoting economic growth, but the bill has drawn concern that political interference in the central bank's policy decisions could undermine its independence.

On June 4, local time, the rupiah had risen to 18,045 per dollar — about 1,541 won — according to AFP and Bloomberg.

The legislation broadens Bank Indonesia's responsibilities to encompass economic growth targets and allows lawmakers to evaluate its performance. Finance Minister Purvaya Yudi Sadewa said the previous day that the bill was designed "to boost economic growth and strengthen international competitiveness at a time when the economy has been hit by surging global oil prices."

Reuters said the law heightens investor concerns that political actors could intervene in the central bank's policy decisions to help President Prabowo Subianto meet his economic growth targets.

President Prabowo has set a goal of achieving 8 percent GDP growth by 2029.

yul@heraldcorp.com