Analysis-Indonesia swallows 'bitter pill' to stem market rout as policy tide turns

JAKARTA - Indonesian policy changes in the last 24 hours show authorities are finally making some tough decisions to try to halt a deepening crisis of investor confidence in the struggling G20 economy.

Investors have been unnerved by President Prabowo Subianto's populist policies, most notably perceived pressure on the central bank to align with his pro-growth agenda, alongside expansive government spending on ambitious social programmes and fuel subsidies from the state budget.

The concerns have sent Indonesia's rupiah and its stock market plummeting.

A source familiar with discussions that led to Bank Indonesia's surprise off-cycle 25-basis-point interest rate hike on Tuesday told Reuters the move had the blessing of the government, and there were no dissenting opinions in the policy meeting.

The source, who requested anonymity due to the sensitivity of the matter, said the move was seen as a "bitter pill" that had to be swallowed to "heal" the economy. Analysts are also expecting another hike at next week's scheduled meeting.

That stands in sharp contrast to the accommodative policy Prabowo has favoured, as he tries to fulfil his election promise of hitting 8% economic growth. Bank Indonesia (BI) had cut rates five times since he took office in October 2024.

Alongside the hike, the source said BI and the Ministry of Finance have agreed to pause aggressive liquidity injections into the domestic market - a policy that the source said had also weighed on the rupiah.

BI also moved quickly to explain its policy decisions to investors in Europe, the United States and Asia, with Governor Perry Warjiyo himself joining the calls, senior deputy governor Destry Damayanti told Reuters.

The moves had an immediate impact. The rupiah recovered more than 1% to 17,940 to the U.S. dollar after hitting multiple record lows in recent weeks. The benchmark stock index has also reacted positively, posting a near 10% gain in the last two trading sessions.

FISCAL MEASURES

In a note, DBS economist Radhika Rao said that alongside monetary policy adjustments a "defensive" fiscal stance will also be required to support the economy.

Hours after the tightening, the government also announced another key measure - raising prices for two types of widely used gasoline by 32%. The politically sensitive hike is the first since the Iran war sent global oil prices surging.

Indonesia has been using state finances to keep fuel prices unchanged, a move seen as shoring up public support.

As a result, subsidies for fuel, power and fertilisers jumped 208% year-on-year to 203 trillion rupiah ($11.30 billion) as of May 31, data showed this month - adding to pressure on the fiscal deficit cap, even as Finance Minister Purbaya Yudhi Sadewa said government finances were under control.

The government has also indicated it is halting an expansion of Prabowo's flagship $20 billion free meals programme, though it stopped short of saying spending would be cut. The budget has already been adjusted to $15 billion, and the agency overseeing the programme has said it was placing a moratorium on new kitchens.

Fiscal governance of the programme, which aims to reach 83 million people, has been a long-standing concern for investors, and Prabowo had previously indicated that he would not back down from it.

Prabowo's office, the government communication office, and BI did not immediately respond to Reuters questions about the rate hike and the agreement to pause liquidity injections.

The rate hike and fuel price increase were a "calibrated response" by the government and showed "growing willingness by policymakers to allow some degree of market adjustment rather than leaning too heavily against prevailing pressures," ANZ Asia economist Krystal Tan said.

'PRO-STABILITY' FOCUS

"The simultaneous hike in the BI rate and the adjustment of fuel prices send a clear signal that the government and monetary authorities are shifting their focus from a 'pro-growth' agenda to one of 'pro-stability'," said Muhammad Rizal Taufikurahman, Head of the Macroeconomics and Finance Center of INDEF (the Institute for Development of Economics and Finance).

"Economic reality is compelling the government to prioritise stability over ambitious growth targets," he said.

Jahen Rezki, an economist at the Institute for Economic and Social Research at the University of Indonesia, agreed.

"The rupiah continues to weaken, while on the other hand, our fiscal position appears likely to face much stronger headwinds this year compared to 2025... This step is necessary and deserves appreciation," Jahen said.

But he warned that while these moves would provide short-term relief, long term Indonesia needed to restore policy credibility.

"Ultimately, this monetary and fiscal policy mix is like 'salting the sea' - it may provide temporary relief, but it cannot address the fundamental issues: policies that miss the mark and the eroding trust in the credibility of policymakers."

($1 = 17,960.0000 rupiah)

(Additional reporting by Tom Westbrook in Singapore;Editing by Ed Davies)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published June 10, 2026 at 5:19 AM.