The economy is not simply a story of prices rising and falling in the market. Behind these movements are household consumption, investment, production, the financial sector, international trade, and government and central bank policies, all of which influence one another. In Indonesia, one of the key instruments shaping these dynamics is Bank Indonesia’s benchmark interest rate, known as the BI Rate.

Simply put, the BI Rate serves as a signal of the direction of Bank Indonesia’s monetary policy. Whenever it changes, its effects can spread across money market rates, bank deposit and lending rates, credit distribution, exchange rates, asset prices, and business expectations. Ultimately, these changes can influence consumption, investment, inflation, and the broader economy.

The year 2026 provides a useful example of how this mechanism works. In April 2026, the BI Rate stood at 4.75%. Bank Indonesia then raised it gradually, increasing the rate by 50 basis points to 5.25% in May, followed by another 25 basis point increase to 5.50% on June 9, and a further 25 basis point increase to 5.75% at the Board of Governors Meeting held on June 17–18. This brought the cumulative increase to 100 basis points within just three months, aimed at strengthening the stability of the rupiah amid global uncertainty while keeping inflation in 2026–2027 within the target range of 2.5% ± 1%.

It is important to understand that the impact of the BI Rate on the economy is not immediate. There is a time lag before changes in monetary policy are fully transmitted through the economy. A change in the BI Rate first affects money market rates, which then influence bank deposit and lending rates.

According to research by Handayani and Kacaribu (2021), this transmission process is characterized by asymmetric responses and rigidity in banking interest rates. These dynamics are also influenced by bank liquidity, risk perceptions, and global economic conditions (IMF, 2026).

Higher domestic interest rates can make rupiah-denominated assets more attractive to foreign investors, potentially encouraging capital inflows and supporting the exchange rate through various channels, including the bond market.

Despite its benefits, a series of interest rate increases, particularly if maintained for too long or implemented too aggressively, can also create side effects for economic activity. First, higher interest rates increase the cost of borrowing while making saving more attractive. This combination may encourage households and businesses to think twice before taking on debt for consumption or investment. As a result, demand may slow and price pressures may ease.

Second, for households, one of the most noticeable effects is reflected in monthly loan payments. Floating-rate loans, including mortgages, are particularly sensitive to changes in interest rates. When installments increase, households have less disposable income available for other needs, which can ultimately weaken purchasing power.

The capital market is also affected. Higher interest rates can make fixed-income instruments more attractive compared with equities, while also increasing the discount rate used to estimate the future value of companies. Both factors can put pressure on stock valuations, particularly in sectors that rely heavily on financing, such as property (Prasetyo, 2020).

All of this demonstrates that interest rate policy inevitably involves a trade-off. Higher interest rates can help maintain rupiah stability and contain inflation, but they can also put pressure on consumption and investment. Conversely, lower interest rates can stimulate economic growth but may increase the risk of inflation and financial instability. For this reason, central banks must consider a wide range of factors before making policy decisions, including inflation, exchange rates, economic growth, capital flows, and global economic conditions.

An increase in interest rates can help ease inflationary pressures and support exchange rate stability. At the same time, however, it can raise financing costs and weigh on consumption and investment.

By understanding these mechanisms, the public can view changes in the BI Rate from a more comprehensive perspective. Interest rate movements are not only relevant to banks and investors; they can also influence household financial decisions, business strategies, and the overall direction of economic activity.