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BI Holds High Interest Rates, Beware Of Rupiah Plunging After Long Holiday

Bank Indonesia's (BI) decision to maintain high interest rates at 5.75 percent in response to the US central bank (The Fed) is feared to have an impact on the weakening of the rupiah exchange rate against the US dollar (US$). 

Referring to real-time Bloomberg data, the NDF rupiah in the European trading session on Monday (12/5/2025), was traded in the range of IDR16,706/US$ at 15.33 WIB. Or weakened by 0.7 percent compared to last week's price. 

The range of IDR16,700 is also the weakest offshore rupiah level since it last occurred on April 29 at IDR16,729/US$. Then it will weaken again after the long Waisak holiday, or on Wednesday's trading (14/5/2025). 

Senior Chief Economist Samuel Sekuritas Indonesia, Fithra Faisal Hastiadi estimates that BI will maintain its benchmark interest rate at 5.75 percent for some time to come. 

Even if the Fed signals no urgency to ease and inflation risks increase due to global tariffs and currency pressures, BI is likely to maintain its benchmark interest rate until early 2026. "For Indonesia, the Fed's stance effectively narrows the room for policy maneuver," Fithra said. 

He explained that although the Fed's decision seemed dovish, it did not provide much benefit for developing countries like Indonesia. 

With US interest rates unchanged, financial market volatility can be temporarily suppressed. However, on the other hand, it also indicates a reduced prospect of a short-term interest rate cut, leaving little room for BI to loosen its monetary stance. 

In addition, US interest rates that remain high plus geopolitical risks that still weigh on investor sentiment will put pressure on the rupiah exchange rate and risk foreign capital flows out of Indonesia. 

"Especially if the Fed is more aggressive because of persistent inflation," he added. 

As a result, this condition makes BI trapped in a difficult position between maintaining rupiah stability or providing economic stimulus. Given the need to manage currency stability and stimulus, especially as Indonesia's economic growth in the first quarter of 2025 slowed to 4.87 percent and became the weakest since 2021. 

However, with US policy remaining tight coupled with the weakening yuan against regional currencies, BI is unlikely to cut rates without the risk of further rupiah depreciation and imported inflation, especially from higher logistics caused by tariff effects. 

"Any premature rate cut could trigger capital flight and further weaken the rupiah, which is already facing depreciation pressure amid global risk aversion," he said. 

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Tag: Bank Indonesia's BI Fithra Faisal Hastiadi Samuel Sekuritas