Indonesia’s central bank lifts interest rates in surprise move to support rupiah and inflation target

Indonesia’s central bank on Tuesday raised its key interest rate in a surprise decision, as the rupiah remained near record lows against the U.S. dollar and investors continued to move away from Indonesian assets. Bank Indonesia said the policy change was intended to reinforce the currency’s value and support price stability, even as it acknowledged the rupiah’s weakness was linked to foreign portfolio outflows.

In its statement, Bank Indonesia raised the 7-day reverse repo rate by 25 basis points, to 5.5% from 5.25%. The decision came after earlier efforts to stabilize the rupiah, including interventions in currency markets and reserve drawdowns reported as the government sought to slow the currency’s decline.

Bank Indonesia described the move as both “pre-emptive” and tied to inflation oversight. The central bank said the rate action was aimed at maintaining inflation within the government’s target range of 1.5% to 3.5% for 2026 and 2027. Recent data cited in reporting indicated inflation was edging higher, reaching 3.08% in May from 2.42% the prior month, compared with market expectations in the high-2% range.

The central bank also linked its decision to capital flows. It said the rate hike was intended to enhance yields and attract foreign portfolio investment inflows to Indonesia. Reporting on the decision said the rupiah’s depreciation was driven in part by foreign portfolio investment outflows, alongside other pressures affecting risk appetite for emerging markets.

The rupiah, meanwhile, was reported to have weakened to 18,190 per U.S. dollar on June 8, near a record low level. On a year-to-date basis, the currency was reported to have depreciated more than 8% against the dollar. Separate reporting cited that Jakarta had drained its forex reserves to their lowest level in nearly two years in an effort to prop up the exchange rate.

The surprise increase follows a prior rate adjustment in May that was larger than expected, according to reporting referenced alongside the Tuesday decision. The central bank has also been described as having intervened in spot and forward foreign-exchange markets, but the rupiah remained under pressure heading into the new move.

Bank Indonesia’s next steps will likely depend on how inflation data evolves and whether foreign investors return as yields change. The central bank’s stated aim was to preserve inflation within its target band while limiting excessive currency volatility, leaving traders and households exposed to continued swings if capital flows remain unstable.