Indonesia

An overview of the effects of monetary policy in Indonesia on GDP and inflation, from 1991 to the present day.

% annual growth rate:

Sources: M3 from IMF database, Nominal GDP from World Bank and OECD database, as of November 2025.

The medium-term relationship between money and nominal GDP growth in Indonesia, 1991-2024

Five-year moving averages of annual % changes, with 1993 being the start of the first five-year period

Comment on monetary trends in Indonesia

Largely as a consequence of deficit monetization, Indonesia saw inflation reach annual rates of 1,000% by the mid-1960s. Relative economic stability did not return until prudent anti-inflationary and free market-orientated policies were imposed by a group of UC Berkeley educated economists. Prudent management of the broad money supply in the 1970s resulted in greater stability of nominal GDP (1970-74 average: 33%) and inflation (1970-74 average: 45%). Between 1966 and 1972, annual inflation dropped strikingly from rates in the order of 1,136.3% to stable rates at around 6.5%.

During the Asian Financial Crisis, Indonesia implemented austerity measures intended to reduce pressure on the government budget and the Central Bank raised interest rates with the aim of preventing capital flight further depreciating the currency. However the higher interest rate policies resulted in a contraction of broad money supply, likely caused by a decrease in commercial bank lending, and as a result, the downturn worsened. In the five-year period from 1995 to 2000, average annual nominal GDP and broad money growth fell from peaks of around 25% and 31% to troughs of around 16% and 10%, respectively. By 1998, real GDP contracted by 13.1%. The economy only recovered after policies aimed at supporting broad money, such as the Bank of Indonesia Liquidity Support policy, were implemented.

In recent years, monetary policy has been particularly cautious – average annual broad money growth has been at its lowest in Indonesia’s economic history, despite recovery from its trough of 4.76% in 2002. This newfound stability may be due to several reasons – in particular, at the end of 1999, the Indonesian Central Bank became an authority independent of the Government, its primary mission being to maintain rupiah stability through ‘inflation targeting’, and to maintain exchange rate stability through currency reserve management. Since 2001, the inflation target, established for three year periods, has been determined by the Government.  

The Bank Indonesia’s (BI) monetary policy response during the COVID-19 pandemic included the sharp lowering of the policy rate as well as QE, which consisted of substantial injections of liquidity into the banking sector and government long-term bond purchases on the primary market. The QE operations had the effect of moderating a severe contraction in commercial bank lending to the private sector. Despite initial inflation overshoots, the BI’s swift normalization efforts by 2022, which included rate hikes and reduced liquidity support, successfully brought inflation back within target by 2023. While Indonesia’s monetary expansion supported economic recovery during the crisis, prudent policy adjustments following the pandemic prevented the combination of QE and a recovery in private sector lending growth from instigating an inflationary boom, distinguishing Indonesia from the inflationary outbursts observed in the US, UK, and EU over the same period.

In 2024-5, inflation remained fairly stable and low while GDP continued to grow at an annual rate of about 5%.

We would like to thank Rizky Wibisono for his contribution to the above commentary and Money Map for Indonesia