Indonesia pledges central bank independence as rupiah hits record low
This comes after lingering fears about government interference in monetary policy as President Prabowo Subianto nominated his nephew as deputy governor of the central bank.
JAKARTA/SINGAPORE: Indonesia's finance minister pledged on Tuesday (Jan 20) to uphold the independence of the central bank, after lingering fears about government interference in monetary policy drove the rupiah currency to a record intraday low.
The rupiah recovered from a slide of as much as 0.3 per cent to 16,985 against the dollar, on investor jitters about President Prabowo Subianto's decision to nominate his nephew as a governor of Bank Indonesia, and overall fiscal health.
"We will maintain the independence of the central bank and the government as much as possible," Finance Minister Purbaya Yudhi Sadewa told journalists. "I will not squeeze the central bank to finance our development programmes."
The currency has fallen nearly 2 per cent in January after dropping 3.5 per cent in 2025. The yield on the 10-year Indonesia government bond was 3.3 basis points higher at 6.33 per cent, its highest in more than three months.
Purbaya sought to allay market concerns about the currency's depreciation, saying economic fundamentals remain sound.
"Although the rupiah has weakened, in percentage terms it is only a small amount, so the system should already be accustomed to this," he said, adding that the impact on the economy was minimal.
Prabowo's nephew, Thomas Djiwandono, currently a deputy finance minister, is one of three nominees whose names have been submitted to parliament, presidential spokesperson Prasetyo Hadi told reporters on Monday.
Purbaya said Djiwandono would resign from Prabowo's political party, Gerindra, and would not be able to influence all board members. Djiwandono did not immediately respond to a request for comment.
BANK INDONESIA MEETING TO KEEP RATES UNCHANGED
The focus will now switch to the central bank's policy meeting on Wednesday, where analysts expect it to stand pat on rates.
Indonesia's deputy finance minister, Suahasil Nazara, will represent the ministry at the review, but will have no voting rights, Purbaya said.
Trinh Nguyen, senior economist for emerging Asia at Natixis Corporate & Investment Banking, expects the rupiah to underperform against other Asian currencies in the short term as investors demand a higher risk premium for the economy.
"Concerns preceded the appointment as investors question the lunch programme and the impact on Indonesia's bright spot – which is low fiscal debt and hard rule on 3 per cent fiscal deficit on GDP," she said, referring to Prabowo's school meals programme.
"Now with the appointment of his nephew, Bank Indonesia will be under pressure to ease monetary conditions," Nguyen added. "But with the rupiah weak, we do not expect the central bank to cut."
BUDGET DEFICIT WOES
Markets were stunned in September when Prabowo abruptly removed Indonesia's influential finance minister Sri Mulyani Indrawati, as investors feared its hard-fought fiscal credibility could soon be eroded.
That also brought Bank Indonesia and its autonomy into the spotlight as investors fretted that independent monetary policymaking might be under pressure, with Prabowo targeting economic growth of 8 per cent by 2029 from about 5 per cent now.
Foreign investors sold a net roughly US$6.4 billion worth of Indonesian government bonds in 2025, adding to the pressure on the currency.
At 2.92 per cent of GDP, the 2025 budget deficit was the widest in at least two decades, except for the COVID-19 pandemic years, and close to a statutory cap of 3 per cent of GDP.
Daniel Tan, portfolio manager at Grasshopper Asset Management, said Prabowo's move to appoint his nephew has further sparked jitters among investors concerned about erosion of central bank independence.
"The nomination added to existing concerns that Indonesia's budget deficit cap could be raised," Tan said.
