New currency faces pressure against the Indonesian rupiah, Indonesian central bank caught in policy dilemma

The Indonesian rupiah has recently shown a weak performance. According to the latest analysis by Dahua Jixian, since 2025, the rupiah has become the second most depreciated currency among Asian emerging markets against the US dollar. The trend of non-USD currency pairs such as the new currency against the rupiah is also under pressure. This exchange rate pressure directly impacts the central bank’s policy space.

The Tug of War Between Inflation and Rate Cuts

The Indonesian central bank is currently facing a classic policy dilemma. On one hand, due to highly accommodative fiscal and monetary policies, inflationary pressures are gradually building up. According to traditional logic, the central bank should tighten policies to address rising prices.

On the other hand, the upcoming harvest season and the government’s strengthened price control measures are expected to alleviate inflationary pressures to some extent. This provides the central bank with further reasons to cut interest rates and support economic growth.

Exchange Rate Concerns Become a Constraint

However, the key issue is—market concerns about the rupiah’s depreciation are constraining the central bank’s easing cycle. If the central bank continues to cut rates, it may accelerate capital outflows and further weaken the rupiah. This would negatively impact import prices and cross-border investment costs.

The central bank’s options are limited to: either continue to cut rates to stabilize growth but risk currency depreciation, or maintain stable policies but potentially hinder economic growth. This is why analysts describe it as a “dilemma.”

In the context of increased volatility in regional currency pairs such as the new currency against the rupiah, the next policy adjustments by the Indonesian central bank warrant close attention.