Indonesia’s central bank has decided to keep interest rates unchanged while introducing new measures aimed at attracting foreign capital and supporting the rupiah, choosing targeted market strategies instead of another increase in borrowing costs.
Bank Indonesia maintained its benchmark seven-day reverse repurchase rate at 5.75 per cent during its July 22 policy meeting.
The deposit facility rate remained at 4.75 per cent, while the lending facility rate stayed at 6.50 per cent.
The decision surprised many economists, who had expected the central bank to continue raising rates to defend the weakening rupiah.
A Reuters survey before the meeting showed that 20 of 33 economists expected a further 25-basis-point increase, while the remaining analysts predicted no change.
Bank Indonesia had already increased interest rates by a combined 100 basis points since May as it attempted to stabilise the currency, improve investor confidence and encourage overseas investors to return to Indonesian markets.
Instead of tightening monetary policy again, Governor Perry Warjiyo said the central bank would rely on a combination of foreign-exchange measures, investment incentives and liquidity management.
He said these tools could attract foreign funds and support the rupiah without creating additional pressure on Indonesian households and businesses.
The decision reflects the difficult challenge facing policymakers.
Bank Indonesia must prevent excessive currency depreciation while avoiding policies that could slow economic growth.
Higher interest rates usually strengthen a currency by making local assets more attractive to foreign investors.
However, they also increase the cost of mortgages, corporate loans and consumer credit, potentially reducing spending and investment.
The central bank believes targeted measures can provide currency support without unnecessarily weakening domestic economic activity.
One of the key initiatives involves reducing the cost of foreign-exchange hedging for international investors.
Currency hedging allows overseas investors to protect themselves against losses caused by exchange-rate movements.
When hedging costs are high, investors may avoid emerging markets even when local bonds offer attractive returns.
By lowering these costs, Bank Indonesia hopes to improve the appeal of Indonesian assets without needing another rate increase.
The central bank is also encouraging greater use of local currencies in international trade and investment transactions.
Reducing dependence on the US dollar could help Indonesia manage risks during periods of dollar strength and improve resilience in regional financial markets.
Indonesia has already established local currency settlement arrangements with several trading partners, allowing companies to conduct transactions directly in rupiah and partner currencies instead of converting through the dollar.
Bank Indonesia is also adjusting liquidity policies for commercial banks.
The measures are designed to ensure banks continue providing credit to important sectors of the economy while monetary policy remains focused on currency stability.
Officials believe this approach can maintain financial discipline while supporting productive investment and business activity.
Following the announcement, the rupiah strengthened slightly, suggesting investors did not view the rate decision as a withdrawal of support for the currency.
However, the rupiah remains under pressure.
Indonesia has experienced capital outflows as investors have raised concerns about government spending plans, commodity policies and the independence of economic institutions.
Global factors have also contributed to market uncertainty.
The renewed conflict involving Iran has increased geopolitical risks, pushed energy prices higher and affected investor sentiment worldwide.
As a net oil importer, Indonesia faces higher costs when crude prices rise, which can increase the country’s import bill and place additional pressure on the rupiah.
During periods of global uncertainty, investors often move funds into safer assets such as the US dollar and American government bonds.
This can lead to capital outflows from emerging markets even when their domestic economies remain relatively stable.
Warjiyo said renewed tensions in the Middle East had contributed to increased volatility in global markets and affected Indonesia’s financial conditions.
The decision to pause rate increases also reflects the delayed impact of previous monetary tightening.
Interest-rate changes usually take months to influence borrowing behaviour, consumer spending, investment decisions and currency expectations.
Officials believe earlier rate increases need more time to fully affect financial conditions before further action is considered.
Economists said the pause gives Bank Indonesia greater flexibility.
The central bank can still increase rates later if the rupiah faces renewed selling pressure or foreign investors remain hesitant.
At the same time, keeping rates unchanged allows officials to evaluate whether investment incentives and market interventions can achieve better results.
Bank Indonesia has already shown a willingness to take aggressive action.
An unexpected rate increase in June helped attract foreign demand for central bank securities and short-term government bonds.
A June auction of Bank Indonesia rupiah securities reportedly attracted around 15 trillion rupiah in demand, indicating that higher yields were beginning to attract overseas investors.
The central bank has also continued direct intervention in currency markets.
It can sell foreign currency reserves, purchase rupiah, use forward contracts and conduct other market operations to reduce excessive volatility.
However, foreign-exchange intervention can only provide temporary support if investor confidence does not improve.
Indonesia’s foreign reserves had already fallen to a two-year low in May as authorities attempted to stabilise the currency.
That has increased the importance of attracting long-term private capital.
The government has introduced broader initiatives aimed at strengthening Indonesia’s position as a regional financial hub.
Parliament recently approved legislation allowing the creation of international financial centres designed to attract foreign banks, investment companies and financial service providers.
The proposed framework includes major tax incentives, including possible corporate tax benefits lasting up to 50 years for eligible businesses.
Officials estimate the financial centres could attract between 300 trillion and 500 trillion rupiah in investment.
Bali has been suggested as a possible location, although no final decision has been announced.
The centres would allow greater use of foreign currencies and operate under specialised regulatory and dispute-resolution systems.
The plan supports President Prabowo Subianto’s goal of expanding Indonesia’s financial sector and accelerating economic growth.
However, analysts warn that financial incentives alone may not fully restore investor confidence.
Markets remain sensitive to concerns about government spending, increased state involvement in the economy and changes to commodity-export regulations.
President Prabowo’s major social programmes, including a nationwide free-meals initiative, have raised questions about future budget pressures.
Investors are also watching the relationship between the government and Bank Indonesia.
Central-bank independence is considered essential during periods of currency weakness because investors want confidence that monetary decisions are based on economic conditions rather than political priorities.
Any perception of political influence over monetary policy could increase the risk premium demanded by foreign investors.
Despite these challenges, Bank Indonesia expects inflation to remain within its target range of 1.5 per cent to 3.5 per cent through 2027.
Stable inflation gives policymakers more room to focus on currency stability and financial conditions.
The central bank maintained its 2026 economic growth forecast between 4.9 per cent and 5.7 per cent.
The broad range reflects uncertainty surrounding global demand, commodity prices, domestic consumption and investment.
Indonesia remains one of Southeast Asia’s largest economies, supported by its large population, expanding middle class and natural resources.
However, short-term foreign investment flows remain highly sensitive to currency movements, interest-rate differences and political developments.
Foreign direct investment in factories, infrastructure and industrial projects is usually long-term and difficult to withdraw quickly.
Portfolio investors in bonds and financial markets can move money much faster when risks increase.
Bank Indonesia’s latest policies are largely focused on attracting this more mobile category of capital.
The strategy aims to make Indonesian assets more attractive while avoiding excessive pressure on domestic borrowers.
Businesses are already adjusting to higher financing costs following previous rate increases.
Another hike could place additional pressure on property, manufacturing, retail and other credit-dependent sectors.
Households could also face higher loan repayments, reducing consumer spending.
The decision to maintain rates therefore represents a balancing act.
Bank Indonesia is keeping monetary policy tight enough to defend the rupiah while introducing targeted incentives to attract foreign investors.
The success of the approach will depend on currency performance, global market conditions and investor confidence in Indonesia’s economic management.
Oil prices, US interest rates and geopolitical developments will remain important factors.
A prolonged increase in crude prices could worsen Indonesia’s trade position, while high US interest rates could continue attracting investors toward dollar assets.
For now, Bank Indonesia has chosen a different path from simply raising rates.
The central bank hopes that cheaper currency protection, stronger investment incentives and careful liquidity management can stabilise the rupiah while protecting economic growth.
However, the long-term success of the strategy will depend not only on monetary policy but also on the government’s ability to maintain fiscal discipline, regulatory stability and investor confidence.
