Bank Indonesia’s Dual Mandate: Independence Under Pressure

The appointment of Destry Damayanti as the new Governor of Bank Indonesia (BI) for the 2026 2031 term was welcomed by the markets. She was appointed after the sudden resignation of Perry Warjiyo. On Destry’s inauguration day on 2 September, the rupiah strengthened to IDR17,763 to the US dollar — a gain of 1.4 per cent since her predecessor resigned on 26 July. The Jakarta Composite Index (JCI) strengthened to 6,595, an increase of 6.6 per cent over the same period. For investors, her appointment signalled continuity. However, the news of the new BI governor may be just the calm before the storm.

Consequential legal developments that took place before the leadership change have been shaping BI’s monetary policy. Law No. 4/2023 on the Development and Strengthening of the Financial Sector (P2SK), along with its June 2026 amendment, has transformed BI’s general principle of central bank independence into a constrained central bank independence. This is characterised by significant statutory exceptions (Table 1).

Table 1: Bank Indonesia Laws Across Three Periods

Dimension	Pre-Act No. 23/1999	After Act No. 23/1999 (up to Act No. 4/2023)	After Act No. 4/2026 (Amended P2SK Law)
Legal status	BI was part of the government apparatus, not a separate state institution.	BI is explicitly an independent state institution, free from government or other parties’ interference, “except for matters expressly regulated by law”.	BI remains an independent state institution, but with significant statutory exceptions, such as the dual mandate and allowing primary-market bond purchases during crisis.
Mandate/Goal	Multiple, broad objectives tied to government economic policy; no single overriding goal.	Single goal: achieving and maintaining the stability of price and the rupiah.	Dual mandate, which includes not only maintaining price and rupiah stability but also supporting economic growth and job creation.
Governor’s position	Governor was a member of the cabinet, at ministerial level, and could be dismissed by the President at any time.	Governor removed from cabinet. BI put outside the government.	Governor remains outside cabinet, but a new mechanism allows parliament to dismiss BI board members based on performance, replacing rules that limited dismissal to resignation or specific legal grounds.
Monetary policy autonomy	Monetary policy was directed by a Monetary Council (Dewan Moneter) under government control.	BI has full authority to set and implement monetary policy independently, with an inflation target agreed with the government.	Monetary policy remains formally independent, but is subject to the parliament’s binding evaluation and recommendation.
Primary market bond purchases	BI had the authority to purchase government debt in the primary market to finance the state budget.	Prohibited	Authorised during a declared national crisis.

The changes to the fundamental law governing the central bank mean that the central bank’s role has shifted from merely a monetary management role to a dual monetary management and quasi-fiscal role.

This is tentative evidence of this. Using monthly data from January 2022 to June 2026, the authors ran statistical tests and found a verifiable break in the behaviour of BI’s policy rate since around November 2024. Further investigation shows that structural breaks are caused by changes in the relations of the BI policy rate with the US federal funds rate and bank credit growth, and not with inflation or exchange rate.

First, BI’s rate has moved more closely in line with the US federal funds rate, suggesting BI is prioritising maintaining interest rate spreads even more than before.

Secondly, there has been a significant change in the relationship between bank credit growth and BI policy rate, from negative correlation (as the standard economic theory suggests that higher interest rates should reduce bank credit growth) to positive correlation. This corroborates with the fact that bank credit growth has been driven by state-related projects and expansive fiscal policy rather than BI policy rate.

BI’s policy has changed to support economic growth and national priority programmes such as free meals. Rather than using direct budget spending, the government uses state-owned banks and enterprises as off-budget vehicles to stimulate priority economic sectors. This is evidenced by the accelerated growth in credit to state-owned enterprises (SOEs). Following Ministry of Finance directives, BI transferred accumulated government budget surpluses (saldo anggaran lebih) totalling IDR300 trillion (USD17 billion) from central bank accounts to state-owned commercial banks starting in September 2025. This fuelled SOE credit growth at more than twice the pace of private-sector lending (Figure 1).

Figure 1. State-owned Enterprises (SOEs) See More Credit Growth

This affects and potentially compromises BI’s monetary policy. In effect, it turns BI’s liquidity operations into a quasi-fiscal tool. Credit is directed toward high-priority SOEs rather than being allocated by market signals (such as interest rates). This raises the risks of misallocation, lower productivity and crowding out private credit. It also weakens the firewall between monetary policy and government financing. If the injected liquidity is not sterilised (where the expansionary effect on money supply is counteracted by contractionary monetary operations), it would expand the monetary base and broad money. This would complicate inflation control and forces BI to choose between supporting priority programmes and maintaining price stability.

Bank Indonesia’s institutional autonomy has anchored Indonesia’s macroeconomic stability since 1999. The recent legal changes may erode this autonomy — and with it, the credibility that stability depends on.

Another instance is BI’s participation in keeping debt financing cheap (means BI suppresses the interest rate the government pays on its bonds) in order to fund the fiscal deficit and priority programmes while preserving debt sustainability. Although lower borrowing costs reduce pressure on the budget and help the government avoid politically difficult spending cuts or tax increases, it may shift the costs to savers or show up as inflation or currency weakness.

BI has acted to achieve lower borrowing costs for the government by stepping up bond market interventions. It purchased long-tenor government bonds and as a result pushed down long-tenor yields relative to short-tenor rates. This led to the compression of the time-risk premium (the extra compensation that investors require for holding longer-term bonds, see Figure 2). These operations effectively suppress long-term borrowing costs for the government, blurring the boundary between monetary policy and fiscal financing.

Figure 2. Flattening Long-Term Yields

This creates a fundamental policy incoherence and compromises BI’s monetary policy. While BI keeps short-term policy rates elevated to track the US federal funds rate and defend the rupiah and capital flows, its quasi-fiscal operations simultaneously inject liquidity and suppress long-tenor bond yields. This has driven rapid growth in different classes of monetary supply (M0 and M2) since the end of 2024 (Figure 3). Artificially depressing long-tenor yields lowers the relative attractiveness of government debt to foreign investors, exacerbating capital outflow pressures and directly undermining the central bank’s exchange-rate defences. It also disincentivises commercial banks from extending long-term private corporate credit. In effect, the central bank ends up effectively financing the government’s budget rather than managing liquidity for the economy.

Figure 3. Ticking Up

Policy Implications

The dual mandate is problematic for Indonesia, but not because the concept is flawed. Several advanced economies such as the US, New Zealand and Australia operate successfully with similar mandates. The problem here is that Indonesia lacks the institutional preconditions to manage the dual mandate safely. According to a Bank for International Settlements study, success with a dual mandate depends on three pillars: clear mandates, strong independence and robust accountability. Law No. 4/2026 erodes all three pillars.

To safeguard macroeconomic stability, three elements are needed. First, BI’s mandate should be clarified by making price and rupiah stability the overriding objectives; the bank’s support of economic growth should be deemed secondary and operationalised only through targeted macroprudential tools. Second, Parliament’s performance-based dismissal and binding evaluation and recommendation power should be removed. Third, situations in which monetary policy is used as a tool of fiscal policy should be limited to primary-market bond purchases under clear crisis conditions. Even under such circumstances, there should be a clear exit strategy.

At a time when the global environment faces various unprecedented shocks — from trade wars to the Strait of Hormuz crisis — BI’s credibility to effectively anchor inflation and rupiah stability is most needed. BI’s institutional autonomy has anchored Indonesia’s macroeconomic stability since 1999. The recent legal changes may erode this autonomy — and with it, the credibility that stability depends on.

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