Rising Interest Rates: How the BI Rate Hike Impacts the Middle Class

Bank Indonesia (BI) has escalated its benchmark interest rate, aiming to stabilize the rupiah and curb soaring inflation. However, this critical economic maneuver is widely expected to disproportionately burden Indonesia’s middle class, pushing many closer to the brink of financial vulnerability.

What is the Connection Between the BI Rate Hike, the Rupiah, Inflation, and Loan Installments?

Bank Indonesia‘s decision to increase the benchmark interest rate primarily serves two strategic objectives:

Stabilizing the Rupiah’s Value.

An increase in the BI Rate directly translates to higher returns on investments. This is intended to attract foreign investors, enticing them to funnel capital into Indonesia through avenues such as government bonds, deposits, business investments, and other financial instruments.

When these foreign investors convert their US dollars into rupiah, the increased demand for the local currency subsequently strengthens the rupiah’s exchange rate.

Controlling Inflation.

The current global landscape is marked by rising oil and gas prices, exacerbated by the ongoing conflict in the Middle East. This surge in energy costs is causing an upward spiral in the prices of goods and services across numerous nations, and Indonesia is no exception.

By elevating the BI Rate, the cost of credit becomes more expensive, leading to higher loan installments for consumers. This, in turn, is expected to prompt individuals and households to reduce their spending. A decrease in consumer demand then helps to temper the rapid escalation of prices, thereby keeping inflation in check.

This latter effect is particularly felt within households, especially among the middle class who are managing mortgages (KPR) or small business loans with floating interest rates that adjust in line with the rising BI Rate.

How Does the BI Rate Hike Impact Households?

Dewi Warastuti’s heart races every time she remembers her home loan installment due date. The recent announcement by Bank Indonesia about the benchmark rate increase only intensifies her apprehension.

“Yes, every month I feel anxious,” shared the private sector employee from Solo, Central Java.

Dewi earnestly hopes that banks will not drastically increase the interest on her home loan.

“If it’s just Rp100,000, that’s still manageable. But if the increase reaches 20% or even 50%, it will definitely be very noticeable. It will be a headache, clearly,” she stated, reflecting the widespread concern among homeowners.

The 45-year-old woman has a home loan with a floating interest rate system, meaning her installments fluctuate with the bank’s benchmark rate. She has been paying for two years, with four years remaining until the house is fully under her name.

Each month, Dewi allocates approximately Rp3 million for her loan installments, a substantial sum that accounts for half of her Rp6 million monthly salary.

“Outside of the installments, there are household expenses like electricity, food, transportation, Wi-Fi, and leisure costs,” she detailed, illustrating the tightrope walk of her finances.

While Dewi has not yet received official notification from her bank regarding any increase in her mortgage payments, this mother of one is already bracing herself for the potential changes.

“Perhaps I will cut back on leisure activities. For instance, I usually eat out two to three times a month. If there’s an increase in mortgage installments, I will definitely reduce that,” she affirmed, highlighting her preparedness for austerity.

Amidst this challenging situation, Dewi feels her family has already “dropped a class” from the middle-income group.

“It’s clear for middle-class people like me, even saving is difficult,” she said with a wry laugh, underscoring the severe strain on her financial stability.

She also struggles to envision the future economic conditions for her household. The middle class, she notes, has been repeatedly hit by rising bank interest rates, along with increasing costs for essential goods such as “rice, cooking oil, and even motor oil.”

“It would be better if the government provided mortgage interest subsidies. This way, people could own decent, affordable homes with lighter installments that don’t burden the community,” she expressed, voicing a common aspiration.

Across the archipelago, Alpian, a resident of Gowa Regency, South Sulawesi, is also preparing to face higher home loan installments. The 39-year-old currently pays Rp2.6 million per month for his mortgage, a figure that could soon rise as it is tied to bank interest rates.

“Yes, I think I have about another year left until it’s paid off,” Alpian remarked, outlining his timeline.

Alpian operates a coffee shop in Makassar, where his income fluctuates, averaging Rp9 million or more per month. His expenditures are primarily directed towards “kitchen necessities and children’s education.”

So far, he remains calm as he has not yet received any notification from his bank about an increase in his home loan installments.

“But I don’t know when it will take effect, because my wife hasn’t started complaining yet,” he said, offering a slight smile, suggesting an impending domestic financial discussion.

Nevertheless, he has already begun strategizing his spending. One key plan involves reducing “healing” and recreation costs.

“Reducing or not buying electronic goods at all. For daily food consumption, perhaps not too extravagant anymore. So, maybe we will be more economical, eating basic side dishes. No more fruits or bread,” he elaborated, mirroring the cutbacks anticipated by Dewi.

During the conversation, Alpian also criticized the government’s fiscal policy for maintaining “wasteful and unproductive” programs like MBG amidst economic pressures. He emphasized that meaningful investments should prioritize education and health.

“What do we want to achieve in the future if we’re only focused on being fed?” he questioned, highlighting his desire for long-term national development.

Who is the Middle Class?

Both Alpian and Dewi Warastuti are categorized as middle class. This classification is determined by their monthly expenditures, aligning with the criteria set by the Central Statistics Agency (BPS).

According to BPS, the middle class plays an indispensable role as a crucial buffer for the national economy. In 2024, the consumption expenditure from the middle class and aspiring middle class is projected to encompass a significant 81.49% of total public consumption. This stark figure underscores that the robust presence of the middle class is a pivotal determinant of economic growth.

A 2025 survey by KedaiKopi further illustrates the financial landscape of this demographic, revealing that three out of ten middle-class individuals carry bank debt (excluding home and vehicle loans). Moreover, nearly half of the middle class also utilize online credit facilities, indicating a widespread reliance on borrowing.

The same survey highlighted that over 80% of the middle class reported that rising prices of basic necessities and increasingly heavy loan installments were key factors influencing a shift towards more cautious consumption behaviors.

The KedaiKopi poll conclusively demonstrates that the world of the middle class is intrinsically linked to credit and installment payments, making them particularly susceptible to economic shifts.

Alarmingly, BPS reports indicate a concerning trend: many middle-class households have “dropped a class” into lower economic categories in recent years. BBC News Indonesia has conducted in-depth coverage detailing the worsening plight of the middle class over the past few years. Several contributing factors have been identified:

Rising cost of living, stagnant incomes.
The lingering impact of the COVID-19 pandemic.
Limited availability of quality job opportunities.
Economic policies that are not sufficiently supportive.
Additional financial burdens and various deductions/levies.
Lack of access to social assistance programs.
Heavy reliance on debt and loans.
Family pressures (the “sandwich generation” phenomenon).

How Far Does the Interest Rate Hike Affect the Middle Class?

The Bank Indonesia policy of raising the benchmark interest rate will only add to the list of challenges mentioned above, according to Achmad Nur Hidayat, an economist from UPN Veteran University.

“Because the middle class is supported by credit. Their car is on credit, their house is on credit, their cell phone is on credit, their laptop is on credit. So, they are actually sensitive to changes in interest rates,” he explained, highlighting the pervasive debt burden.

According to Achmad, the middle class has been repeatedly hit, experiencing “an inflation rate far higher than the rate of income increase.”

“This [interest rate hike] is perhaps the second round of inflation increase, and the ultimate third round might be a suppression of our economic growth,” he cautioned, predicting a cascade of negative economic consequences.

Will the BI Rate Hike Be a Panacea for Economic Stability?

Achmad Nur Hidayat describes Bank Indonesia‘s move to raise the benchmark interest rate as a “dishwashing” exercise, implicitly cleaning up the government’s fiscal policy issues.

“I interpret it that the rupiah’s weakness is due to domestic pressure, fiscal pressure, which is heavier than the monetary aspect,” he asserted, shifting the focus of responsibility.

The fiscal pressures he refers to include unproductive government spending, meager state revenues, ballooning debt, and state intervention in commodity exports—all factors that undermine economic resilience.

The disarray in the government’s management of state finances is further evident in analyses and reports from global rating agencies, which have downgraded Indonesia’s outlook from stable to negative.

“They have red criteria, right? The red criterion is fiscal sustainability,” Achmad pointed out, emphasizing the critical concerns of international observers.

He argues that the benchmark interest rate hike will struggle to restore the rupiah’s value to the Rp17,000 level unless fundamental fiscal policies are reformed and strengthened.

Public attention has been drawn to large-budget state expenditures, particularly the “Free Nutritious Meals” (MBG) program and the “Red and White Cooperatives.” Achmad urged the government to reprioritize its spending budget.

“The MBG spending, the Red and White Cooperatives spending, with all their components, are deemed ill-timed. Not that the programs themselves are bad, but at a time when revenues are problematic, we are expanding by relying on external financing. And this makes investors think and calculate,” he elaborated, highlighting the potential for investor apprehension.

In a separate instance, Finance Minister Purbaya Yudhi Sadewa claimed the government would cut the MBG budget to save the state budget. The initial MBG budget of Rp335 trillion was reportedly slashed to Rp268 trillion.

“The President is calculating the best way to achieve savings without disrupting the effectiveness of the program itself in terms of feeding schoolchildren. That is what’s important,” Purbaya was quoted by Kompas, emphasizing the government’s balancing act between austerity and social welfare.

Meanwhile, David Sumual, Chief Economist at Bank BCA, views the BI Rate hike as a necessary preemptive measure to prevent the situation from deteriorating further amidst global pressures.

“Yes, at least it can dampen the impact. If it’s not done, it could get much worse,” he remarked, underscoring the defensive nature of the policy.

However, Sumual acknowledges that this policy comes at a cost, specifically the increase in loan installments for businesses and home mortgages.

Nevertheless, Sumual suggests that the benchmark interest rate hike will not automatically cause the middle class to “fall a class.” He believes that banks do not always apply BI’s benchmark rates drastically, as “banks don’t just arbitrarily raise [interest rates].”

“It also seems that competition in the banking sector is currently intense,” he added, implying that competitive pressures might temper the full pass-through of rate hikes to consumers.

Conversely, Yanuar Rizky, an economist from Bright Institute, views Bank Indonesia‘s decision to raise the benchmark interest rate as “too late.”

He contends that BI was slow to respond to global pressures, becoming overly focused on maintaining government image and bond market stability, thereby missing the optimal window to effectively control the rupiah and inflation.

“In simple terms, BI was essentially tasked with maintaining the government’s image—that the economy is stable, and government bonds are stable. Amidst such global pressures, we appear stable,” he stated, suggesting a focus on perception over proactive intervention.

According to Rizky, BI’s measure will only stem a deeper fall of the rupiah, rather than restoring its original value. “At best, the BI Rate hike will only prevent it from reaching Rp18,000,” he predicted, setting a conservative expectation for the policy’s impact.

President Prabowo Acknowledges the Middle Class’s Decline

During his address to the House of Representatives on Wednesday (20/05), President Prabowo Subianto highlighted a significant discrepancy: the growth in Indonesia’s total economic activity, or Gross Domestic Product (GDP), has not corresponded with an improvement in public welfare. This revelation underscores a critical challenge facing the nation.

Over the past seven years, Indonesia’s GDP has surged by an average of 5%, nearly reaching USD 1.5 trillion. Yet, disturbingly, during the same period, the number of impoverished individuals increased, and a substantial portion of the middle class experienced downward mobility.

“This might be painful for us. I feel, after I received these data, a few weeks after becoming president, as if I was punched in the gut,” Prabowo confessed, conveying his profound concern over the disparity.

However, Prabowo does not attribute the root cause of this anomaly to the government’s fiscal policies. Instead, he points to what he terms “leakage” of state funds abroad, identifying this as a primary drain on national wealth.

He explained that this data anomaly stems from “under-invoicing,” a practice involving the manipulation of export commodity sales invoices to reflect prices below their actual value. The ultimate aim of this illicit activity is to minimize tax payments to the state, depriving the treasury of much-needed revenue.

In response to this perceived leakage, Prabowo issued a government regulation empowering State-Owned Enterprises (BUMN) to control the export transactions of key commodities such as coal, palm oil, and iron alloys. However, this policy has ignited controversy, with critics arguing it could disrupt existing export governance and even accusing the government of attempting to monopolize export control.

President Prabowo tasks SOEs to control commodity exports – ‘If corrupt behavior persists, there will still be leakage’

Journalists Fajar Sodiq in Solo and Darul Amri in South Sulawesi contributed to this report.

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Summary

Bank Indonesia (BI) has increased the benchmark interest rate to 5.25% to stabilize the rupiah and curb inflation amid global economic uncertainty. This policy is expected to heavily impact the middle class, as rising rates lead to higher loan installments for mortgages and personal credit. Consequently, many households are forced to adopt more frugal lifestyles or risk falling into a lower economic class due to the increased financial strain.

Economists and government officials acknowledge the challenges, noting that Indonesia’s middle class is particularly vulnerable because their financial stability is heavily tied to debt. While some experts view the hike as a necessary defensive measure to prevent further economic deterioration, others argue that fundamental fiscal reforms are needed to ensure long-term stability. Despite the government’s efforts to manage the budget and address economic leakages, the middle class continues to face significant pressure from rising living costs and limited income growth.