On Wednesday, Indonesia’s central bank surprised economists by increasing interest rates to their highest level in seven years. The move aimed to bolster the rupiah, which has been weakening against the dollar despite multiple interventions in currency markets. While economists anticipated the Bank Indonesia to maintain the seven-day reverse repurchase rate at six percent, it raised it by 25 basis points to 6.25 percent, reaching a level last seen in 2016. Additionally, its two other main rates were also raised by 25 basis points. Bank Indonesia Governor Perry Warjiyo stated at a news conference that the interest rate hike aimed to enhance the stability of the rupiah’s exchange rate amidst potential worsening global risks. Since emerging from the Covid-19 pandemic, Bank Indonesia, like other global central banks, has tightened monetary policy to address surging inflation, partly fueled by Russia’s invasion of Ukraine. Perry characterized the move as preemptive and forward-looking, aimed at ensuring inflation remains within the bank’s target range of 1.5-3.5 percent, with the current rate standing at 3.05 percent. Despite the rupiah’s outperformance against regional currencies amidst a strengthening US dollar, it has still depreciated by over five percent since the beginning of the year, even after numerous interventions to support it. The dollar’s strength is bolstered by reduced expectations of Federal Reserve interest rate cuts this year, as US inflation remains persistently above target. Economists suggest that if the rupiah’s decline persists, Bank Indonesia may implement further tightening measures. Gareth Leather, Senior Asia Economist at Capital Economics, noted that while the central bank has intervened in foreign exchange markets to bolster the currency, continued weakness in the rupiah may prompt additional rate hikes.