Why the growth pivot is stirring debate
Bank Indonesia (BI) is pressing harder on growth just as its independence faces the toughest scrutiny since post crisis reforms. A series of interest rate cuts, a novel cost sharing arrangement with the government, and the relocation of large state funds into banks have lifted hopes for faster lending. They have also sparked unease about blurred lines between monetary and fiscal policy, the outlook for the rupiah, and the credibility that took decades to build.
As of August 2025, bank credit grew 7.56 percent from a year earlier, below the 10 to 12 percent pace that was common before the pandemic. Capital buffers are strong and reported non performing loans are low. Yet much of the liquidity injected by BI is sitting on bank balance sheets or parked in government securities rather than flowing to new factories, equipment, or small businesses. The government, seeking to jump start credit, placed around 200 trillion rupiah of state funds into major state owned lenders in September to expand loans to housing, cooperatives, and small firms.
BI has lowered its benchmark seven day reverse repurchase rate six times since late 2024, bringing it to 4.75 percent, before pausing at that level at the October 2025 meeting to assess transmission and protect rupiah stability. The bank also reduced its lending and deposit facility rates, and increased liquidity through open market operations and secondary market purchases of government bonds. Officials argue that inflation remains within the target range, growth is below potential, and policy space exists to support demand without jeopardizing stability.
Where is all the liquidity going
There is a striking mismatch between abundant system liquidity and modest growth in productive credit. Banks report large volumes of approved but undrawn loans, totaling more than 2,372 trillion rupiah by late third quarter, while a meaningful share of funds stays in high quality securities or central bank instruments. Lending rates at commercial banks have fallen little compared with the cuts in BI’s policy rates, and credit standards remain tight for sectors that are still healing from the pandemic shock.
At recent press briefings, Governor Perry Warjiyo set out the bank’s case that demand needs support while market stability is preserved.
“Economic growth is still below national capacity, so demand needs to be pushed,” he said, adding that BI has been “going all out to support growth while maintaining financial market stability.”
The governor also responded to criticism that liquidity in banks is too tight by pointing to the gap between approved and drawn loans and by calling on lenders to pass on lower policy rates.
“Liquidity is ample but demand for credit has been weak as businesses are in a wait and see mode,” Warjiyo said. “Commercial banks should follow BI’s lead and reduce lending rates.”
Why credit demand is soft
Household and corporate appetite for new borrowing has cooled. Vehicle sales have fallen in recent months, consumer confidence has eased, and export growth has slowed, pointing to caution among businesses and households. Many firms still carry excess capacity, while some small and medium enterprises face collateral constraints or uncertain sales. Banks that navigated the last credit cycle with care are reluctant to stretch standards until they see firmer demand and better pricing for risk.
Burden sharing and blurred lines
Indonesia’s new burden sharing compact between the central bank and the finance ministry aims to cheapen the cost of funding priority programs. The agreement includes higher remuneration paid by BI on government deposits that it holds, interest cost sharing for public housing and cooperatives initiatives, and continued bond buying in the secondary market when needed to keep markets orderly. Supporters say the measures are measured, time bound, and designed to speed up transmission into the real economy.
Economists warn that the line between independent monetary policy and fiscal operations can get thin when a central bank helps to fund government programs or pays above market rates on public deposits. They argue that even if inflation is tame today, repeated quasi fiscal actions can harden expectations that the bank will serve near term political goals.
One Indonesian economist, Wijayanto Samirin of Paramadina University, voiced unease that policy makers are straying into fiscal terrain.
“Several things BI is doing are odd. They get too deep and detailed into fiscal matters and this disrupts our monetary policy ecosystem,” he said.
International market watchers have raised questions about the novelty of the deposit remuneration step. Rain Yin, a sovereign analyst at S and P Global Ratings, said the arrangement looked unusual.
“Given the pressures on revenue, we see the latest move as an effort to raise funds to keep the fiscal deficit close to the government’s target,” Yin said.
Jahen Rezki at the University of Indonesia noted the risk that political ambitions could expand the scheme.
“The deal opens up opportunities for the government to be bolder in introducing populist policies,” he said, warning that a sustained push could spark inflation overshooting in the long run.
Officials in Jakarta insist the collaboration respects monetary boundaries and market discipline. In a joint statement, the finance ministry and the central bank pledged to keep the arrangement transparent and accountable, and to preserve prudent policy frameworks.
The commitment helped calm parts of the market. Questions linger over the exact interest rates, the size of the program, and how long it will run, which are the details investors use to price risk.
Independence at stake, law and oversight
Indonesia rebuilt central bank independence in the early 2000s after painful lessons from the Asian Financial Crisis. The legal foundation was strengthened by the Bank Indonesia Law and later by the Financial Sector Development and Strengthening Law of 2023, known domestically as the P2SK Law. That law broadened BI’s mandate to include support for economic growth, alongside price stability, the payments system, and financial stability. Independence is anchored in the 1945 Constitution, Article 23D, and by safeguards such as fixed terms for the Board of Governors and prohibitions on external interference in monetary decisions.
Parliament is now considering amendments that would expand oversight and adjust BI’s objectives. Draft provisions discussed by lawmakers include giving the House of Representatives stronger power to evaluate BI’s performance on a regular schedule, adding growth and job creation as explicit policy goals, and even allowing the legislature to initiate dismissal proceedings for members of the Board of Governors under certain conditions. Critics inside Indonesia say these steps could tilt the balance away from functional independence and increase the risk of near term political pressure shaping monetary actions.
What checks and balances matter
Clarity and limits are the essence of safeguards when mandates expand. Clear separation of monetary tools from fiscal operations, public disclosure of the size and cost of any extraordinary support, explicit caps and sunset dates for temporary schemes, and a firm restatement that price stability and rupiah stability remain the primary anchors would help preserve credibility. Regular reporting to the legislature can coexist with protection from day to day political instruction if roles are well defined in law.
Markets watch the rupiah and bonds
Financial markets are reacting in real time to the mix of easier money and deeper state involvement. The rupiah has struggled this year against the dollar even as the greenback softened globally at times. A top forecaster recently warned the currency could test 17,000 per dollar, near record territory, if investors continue to doubt the direction of policy. Domestic equities have had support from lower rates, yet foreign investors sold close to 1.9 billion dollars in government bonds between mid September and mid October, signaling nerves about policy clarity and institutional checks.
Some global investors have framed the issue as one of institutional strength. Raza Agha, who leads emerging market sovereign strategy at a major asset manager, put it bluntly.
“Strong public institutions, including an independent central bank, are a key pillar in maintaining macroeconomic stability and investor confidence,” he said.
That message is consistent with the behavior of many global funds, which reward countries that show clear rules and credible independence with lower borrowing costs. Policy clarity will be key to restoring steady inflows.
Inflation, growth and the rate path
Headline inflation sat near 2.65 percent during the third quarter, comfortably within BI’s 1.5 to 3.5 percent target band. Growth held around 5 percent year on year, with a faster second quarter followed by signs of cooling in the third quarter from high frequency indicators. After cutting the policy rate to 4.75 percent by September, BI surprised markets by leaving it unchanged at the October meeting to observe how earlier easing flows through and to steady the rupiah. The bank signaled it would keep reviewing the room for further cuts in line with inflation and currency stability.
Private sector economists are split on how much more easing is possible without endangering credibility. Some expect the policy rate to drift to 4.5 percent by year end, then approach 4.0 percent in early 2026 if the dollar weakens and the rupiah firms. Others warn that an aggressive push could invite a jump in risk premia on Indonesian assets if investors conclude that policy is driven by near term growth targets. Many also point to weak transmission. Lending rates at commercial banks have barely budged compared with the reduction in BI’s main rates because banks are guarding margins and assessing borrower risk. That lag is one reason the finance ministry moved public funds into state banks to force a faster pickup in lending.
What counts as fiscal dominance
Analysts use the term fiscal dominance when the central bank’s choices are shaped mainly by the government’s funding needs rather than by inflation and currency stability. Raising the remuneration on public deposits at the central bank to help finance priority programs is unusual by international standards. In many countries central banks pay dividends to the treasury out of profits. When the flow of funds runs the other way on a sustained basis, questions arise about incentives. The longer such schemes run in a growing economy, the greater the risk that money creation to support budgets eventually shows up as higher inflation, even if the short term impact looks benign while the output gap is still negative.
Lessons from Turkey and Argentina
History offers caution. In Turkey, heavy political influence over interest rate decisions muddied inflation control, and price growth spiked while the currency lost ground. Argentina’s long record of financing budget needs through its central bank has fueled recurrent bouts of inflation and exchange rate instability. Indonesia’s fundamentals and institutions are stronger, and the country is nowhere near those extremes. The comparison is a reminder that regular pressure to keep money cheap for growth or popular programs can corrode the guardrails that keep inflation expectations anchored. Once expectations move, bringing them back down often requires a long period of high real interest rates and slower activity.
Strengths that can anchor credibility
Indonesia enters this debate from a position of relative balance. International assessments find macrofinancial vulnerabilities to be low. The largest banks hold capital and liquidity well above minimum requirements, and supervisory tools and data collection are broadly in line with global practice. The current macroprudential stance looks accommodative without posing near term risks to stability. Authorities could still refine the toolkit by setting out clearer objectives for inclusive financing programs and by separating such schemes from macroprudential instruments so that financial stability goals remain distinct and measurable.
BI’s capacity to manage external shocks has also improved. The central bank has overhauled its foreign exchange reserves framework to respond more quickly to market shifts. That has helped policy makers navigate swings in United States interest rates and maintain intervention capacity to smooth rupiah volatility. The same framework supports monetary operations and advances in the payments system.
A practical playbook to draw the line
Indonesia can sustain growth support while safeguarding independence by setting firm boundaries and explaining them clearly. Steps that would help include:
- Publish the size, interest rates, and maturity of any burden sharing or deposit remuneration schemes, and set sunset dates tied to objective conditions.
- Reaffirm in law and in policy communications that price stability and rupiah stability are the primary objectives of monetary policy, with growth support as a secondary aim that must not conflict with the anchors.
- Keep any bond purchase operations focused on market functioning in the secondary market, with transparent criteria and reporting.
- Avoid direct financing of specific government programs through the central bank. Channel development lending through banks and the budget, with parliamentary oversight.
- Strengthen policy rate transmission by publishing guidance on lending rate pass through, and by adjusting macroprudential settings where safe to ease collateral and capital constraints.
- Coordinate regularly with the finance ministry on the macroeconomic outlook, while keeping a clear wall between monetary decisions and fiscal program design.
- Clarify the legal boundaries in any amendment to the P2SK Law so that legislative evaluations do not turn into operational direction or personnel interventions.
- Maintain buffers by preserving an adequate level of foreign exchange reserves and liquidity instruments that can be deployed if global conditions tighten.
Key Points
- BI has shifted toward growth support with multiple rate cuts to 4.75 percent, a pause in October, and a burden sharing arrangement with the government.
- Credit growth is 7.56 percent year on year as of August, still below pre pandemic norms, with large undrawn loan commitments and slow rate pass through.
- The finance ministry placed about 200 trillion rupiah in state banks to spur lending, while BI pays higher interest on government deposits to help fund housing and cooperatives programs.
- Economists and investors warn that repeated quasi fiscal steps risk eroding BI independence, lifting risk premia, and pressuring the rupiah.
- Lawmakers are debating amendments that would expand legislative oversight and add growth and jobs as objectives, raising concerns about central bank autonomy.
- Inflation is within target and growth is near 5 percent, but market nerves have fueled bond outflows and currency weakness.
- International reviews see low vulnerabilities and strong bank buffers, and BI has upgraded its reserves management to handle external shocks.
- Clear limits, transparency, and a restated commitment to price and currency stability would help keep credibility intact while supporting growth.
