“In this situation, the central bank is not only managing inflation; it is striving to safeguard its policy anchor. Once the market begins scrutinizing the rupiah’s terminal level, inflation anchor, and coordination between fiscal and monetary measures, stabilization will become more costly,” he said.
He stated in Jakarta on Monday that the absence of clear policy adjustment signals, particularly regarding domestic energy prices, subsidies, and fiscal calibration, is shifting the adjustment burden almost entirely onto the exchange rate.
Indonesia adopted the open capital flow regime after the 1998 crisis, he said, noting that it could trigger a more aggressive Dornbusch overshooting phenomenon under current circumstances.
On that note, Fulvian argued it is vital for BI to revisit a classic stabilization approach once used during external pressures, which might entail raising its interest rates by 50 basis points.
“In this scenario, an interest rate hike does not indicate a faltering economy or elevated inflation. Rather, it is necessary to spare us higher costs in the future,” the economist explained.
He recalled that Indonesia took a similar step in 2018, when BI raised interest rates aggressively despite contained inflation to stabilize the rupiah and strengthen market confidence amid external pressure.
Beyond consumer price inflation, he said, the central bank must also focus on expectations, exchange rate stability, and maintaining a medium-term inflation anchor to anticipate sharper market-driven adjustments.
He added that a rate hike should not be viewed as excessive monetary tightening, as Indonesia now has more flexible macroprudential instruments compared to previous tightening cycles.
In coordination with the Financial Services Authority (OJK), credit distribution to priority sectors could still be maintained through liquidity incentives and targeted sectoral policies, he said.
“This is not an anti-growth policy. It is an effort to maintain macroeconomic stability and protect growth from more severe disruptions caused by imported inflation, balance-of-payments pressure, and rising risk premiums,” he added.
Fulvian noted that a more hawkish stance from BI could help normalize market structure, reverse currency overshooting, and eventually strengthen the rupiah, which is projected to recover from Rp17,600 to Rp16,800 per US dollar.
He also stressed the importance of diversifying financing sources beyond the US dollar.
“The world is changing. Global liquidity is no longer solely anchored to the US dollar. Indonesia must begin developing more diversified financing strategies to shift stabilization costs away from the rupiah and domestic markets,” he concluded.
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Translator: Bayu Saputra, Tegar Nurfitra
Editor: M Razi Rahman
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