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

% annual growth rate:

  M3 Nominal GDP
1991 – 2020 16.27% 14.82%
1991 – 2000 26.04% 19.92%
2001 – 2010 12.80% 16.44%
2011 – 2020 11.46% 8.53%

Sources: M3 from IMF database, Nominal GDP from World Bank and OECD database, as of September 2023.

The medium-term relationship between money and nominal GDP growth in Indonesia, 1991-2022

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 Chicago-school 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.  

Indonesia’s economy contracted in 2020 as a result of the coronavirus pandemic. However, the contraction was fairly modest compared with many other countries and it had recovered by 2021. Inflation did rise, but as broad money growth had not accelerated dramatically, the peak was only an annual rate of 6% in mid-2022, after which it declined. Broad money growth has been low and stable throughout 2023 while interest rates, after being hiked by 225bps in the space of less than a year, have probably reached the peak of the current tightening cycle.  

We would like to acknowledge Rizky Wibisono for his contribution to the segment Money Map for Indonesia