Bank Indonesia's split decision: buying time, not trust

<p><em>Special Reporting from LSN News, adapted from today's Asia Money Map episode. <a href="https://youtu.be/Bf6cbQLYq2s" target="_blank" rel="noopener">Watch the video on YouTube.</a></em></p>

<p>Fifteen against fourteen. That is how closely economists polled by Reuters were split before Bank Indonesia's decision on Wednesday, 21 October. Fifteen expected the central bank to hold its main rate; the rest wanted a hike to defend the rupiah. In the end, Bank Indonesia tried to give both camps something, and the markets were left to work out what it meant.</p>

<h2>Hold, hike and cut on the same day</h2>

<p>Bank Indonesia held its benchmark BI-Rate at 5.75%, for a fourth straight meeting. But it raised its overnight deposit facility rate by a quarter point, to 5%, and left the lending facility at 6.5%. At the same time, it will cut the reserve requirement for conventional banks from 9% to 7% in two steps, on 1 November and 1 December. Governor Destry Damayanti said that would free up about Rp190 trillion, roughly $10.5 billion, for the banking system. The central bank also sweetened hedging incentives for foreign money coming into the country.</p>

<p>Why such a mix? Deputy Governor Solikin Juhro put it this way: "Because we are addressing multiple challenges, we need to address them with different policies." The deposit-rate hike is meant to keep rupiah assets attractive and steady the market. The reserve cut is meant to help banks lend and create jobs.</p>

<p>The backdrop explains the pressure. Indonesia's stock market has just been through a record two-day rout, steeper than any recorded during the Asian financial crisis, Reuters reports, after MSCI warned it could relegate Indonesian equities to "standalone" status. The rupiah is this year's worst-performing emerging Asian currency, down more than 7% against the dollar.</p>

<h2>How the markets voted</h2>

<p>The rupiah closed at 18,022 per dollar on Wednesday, back above the 18,000 line and about 0.17% weaker on the day, according to Antara. The Jakarta Composite Index rose 0.94%, to about 5,328, after falling in the morning session. Local market data show foreign investors were still net sellers, though by far less than on Tuesday.</p>

<p>The critics were blunt. Capital Economics' Gareth Leather called the moves "very confusing." He said Bank Indonesia is "trying to do two things at once," and warned the moves "risk further undermining their credibility." His colleague Jason Tuvey wrote that the mixed messages risk "fuelling fresh pressure on the rupiah and ultimately forcing policymakers to keep interest rates high for longer."</p>

<p>Not everyone agrees. Bank Danamon economist Irman Faiz argued the deposit-rate hike could stop the extra cash from the reserve cut pushing money market rates too low and weakening the rupiah's carry appeal. Bank Indonesia has its own defence: it says its hedging and incentive tools have drawn $9.9 billion of foreign inflows since June, and that reserves stood at $146.3 billion at the end of September, more than five months of imports. But its own statement also flags "a strong likelihood" of another rate rise in the United States, with oil prices kept high by the war in the Middle East.</p>

<h2>Asia's shared squeeze</h2>

<p>In Seoul, all 34 economists in a Reuters poll expect the Bank of Korea to hold its rate at 3% on Thursday, 22 October, after two hikes in a row. In Manila, all 20 economists polled by the Philippine Daily Inquirer expect the Bangko Sentral ng Pilipinas to raise rates again the same day, from 5%, after inflation hit 7.2% in September. On Wednesday, the Philippine peso was the weakest of the Asian currencies tracked by Bisnis.</p>

<p>In LSN's reading, Asia's emerging markets face the same squeeze: a strong dollar, expensive oil and nervous foreign money. Manila is fighting it with interest rates. Jakarta is trying to fight it with plumbing: hedging discounts, deposit rates and liquidity rules. That can work, but only if investors believe the central bank will raise its main rate when it has to.</p>

<p>What to watch: the rupiah against the 18,000 line, foreign flows in Jakarta, the first reserve cut on 1 November, and Thursday's decisions in Seoul and Manila.</p>

<p>Our verdict: Bank Indonesia bought time, not trust. A quarter point on the deposit rate is a signal, but freeing up $10 billion of liquidity in the same breath tells markets it wants growth just as much. When foreign investors are already heading for the exit, mixed messages carry a price, and the rupiah's first reaction was to slip. If the outflows continue, Jakarta may end up delivering the hike it avoided this week, on worse terms. The question for Asia is simple: is it cheaper to pay for credibility now, or later?</p>

<h2>Sources</h2>

<ul>

<li><a href="https://www.bi.go.id/en/publikasi/ruang-media/news-release/Pages/sp_2823326.aspx" target="_blank" rel="noopener">Bank Indonesia, 21 Oct 2026</a></li>

<li><a href="https://finance.yahoo.com/economy/policy/articles/indonesias-central-bank-keeps-main-074053200.html" target="_blank" rel="noopener">Reuters via Yahoo Finance, 21 Oct 2026</a></li>

<li><a href="https://english.kontan.co.id/news/bank-indonesia-keeps-benchmark-steady-cuts-required-reserves-after-stock-market-rout" target="_blank" rel="noopener">Reuters via Kontan, 21 Oct 2026</a></li>

<li><a href="https://theedgemalaysia.com/node/822674" target="_blank" rel="noopener">Bloomberg via The Edge Malaysia, 21 Oct 2026</a></li>

<li><a href="https://www.antaranews.com/berita/5801545/bi-rate-tetap-575-persen-bunga-deposit-facility-naik-jadi-5-persen" target="_blank" rel="noopener">ANTARA, 21 Oct 2026</a></li>

<li><a href="https://en.tempo.co/read/2122031/rupiah-closes-at-rp18022-per-dollar-amid-msci-concerns" target="_blank" rel="noopener">Tempo English (Antara), 21 Oct 2026</a></li>

<li><a href="https://market.bisnis.com/read/20261021/93/2014517/rupiah-ditutup-melemah-sentuh-rp18022-usai-bi-tahan-suku-bunga-acuan-575" target="_blank" rel="noopener">Bisnis.com, 21 Oct 2026</a></li>

<li><a href="https://www.antaranews.com/berita/5802201/ihsg-menguat-didorong-inisiatif-regulator-pulihkan-kepercayaan-pasar" target="_blank" rel="noopener">ANTARA (JCI close), 21 Oct 2026</a></li>

<li><a href="https://databoks.katadata.co.id/en/market/statistics/6ad888653144b/ihsg-edges-up-after-bi-keeps-interest-rates-steady-wednesday-october-21-2026" target="_blank" rel="noopener">Katadata Databoks, 21 Oct 2026</a></li>

<li><a href="https://www.cnbcindonesia.com/market/20261021133036-17-778189/ihsg-anjlok-084-di-sesi-i-asing-kabur-rp58159-miliar" target="_blank" rel="noopener">CNBC Indonesia, 21 Oct 2026</a></li>

<li><a href="https://www.channelnewsasia.com/business/south-korea-central-bank-hold-rates-october-22-hike-in-november-reuters-poll-6473951" target="_blank" rel="noopener">Reuters via CNA, 20 Oct 2026</a></li>

<li><a href="https://business.inquirer.net/616528/poll-bsp-seen-raising-rates-again" target="_blank" rel="noopener">Philippine Daily Inquirer, Oct 2026</a></li>

</ul>