7 Challenges for the Bank Indonesia Governor in a New Era

Many odd things feel commonplace in the world economy today. A war thousands of kilometres from Indonesia can bring shocks to the Indonesian economy. Bank Indonesia can see controlled inflation and an economy in need of support, but a rise in United States bond yields can put pressure on the rupiah and make room for lowering interest rates disappear.

Elsewhere, change is happening even faster. Money that once took days to move now moves in seconds. Companies with thousands of workers coexist with technology companies of enormous value but with few physical assets.

Liquidity can be abundant in banking without turning into credit, while changes in bond prices or exchange rates can tighten economic conditions even before banks change their lending rates, while changes in payment system technology alter how policy transmission takes place.

The economic world has changed faster than our old way of imagining how monetary policy works. That is the context currently accompanying the fit and proper test of the Bank Indonesia Governor in 2026. What is being tested is not only the competence of the BI Governor candidate, but also a way of thinking about what kind of central bank Indonesia needs after the world that gave birth to it has changed.

Most of the modern central bank architecture was built from the experience of high inflation in the 1970s and 1980s. Central bank independence was strengthened, inflation targeting developed, and interest rates became the main instrument. The government manages fiscal policy, the central bank maintains price stability.

That framework reached its golden age during the Great Moderation. Globalisation suppressed production costs, China became increasingly integrated with world trade, supply chains became efficient, and geopolitics was relatively stable. Inflation could increasingly be imagined as a demand problem that could be managed through interest rates.

Within the New Keynesian framework, there is even a term known as divine coincidence, in which under certain conditions, maintaining price stability simultaneously brings economic output towards the desired condition. A very strong belief was born: price stability more or less means macroeconomic stability.

Nothing is entirely wrong with that framework. Many of its principles must in fact be maintained. The problem today is not the framework, but that the world that made the framework work has changed.

The global financial crisis showed that inflation can be low when risks to the financial system are growing. The pandemic showed that an economy can stop because of production and distribution, not because of interest rates. After that came war, trade fragmentation, climate change, AI, industrial policy, and the contest for technology and strategic resources.

Meanwhile, the financial system itself is changing; bond markets, equities and fintech have become inseparable parts of determining financing conditions. Capital can move between countries in seconds. Technology is changing how money moves. Even the boundary between money, assets and payment systems is increasingly blurred in the era of crypto and digital payment.

Indonesia is facing all of these changes at once. So the question for the next Bank Indonesia Governor is no longer simply what the right BI Rate is, and how to manage the balance of payments and external and internal balance. The question is whether our way of understanding the central bank’s job still fits the economy it now has to guard.

From here at least seven challenges emerge for the Bank Indonesia Governor in the new era.

When Guarding Inflation Is No Longer Enough

The first challenge is the evolution of the inflation targeting framework. Inflation must still be guarded. Indonesia still needs a nominal anchor and an institution trusted to maintain the value of money. But the issue now is not simply what the right inflation target is, but whether the assumptions that once made inflation targeting work are still as strong.

This framework developed in a world that was relatively friendly to central banks. Globalisation suppressed production costs, supply chains became more efficient, geopolitics was relatively stable, and inflation was more often read as a demand problem. When the economy overheated, the central bank raised interest rates, demand fell, the output gap narrowed, and inflation was controlled.

But one by one the assumptions behind that comfort are changing. First, inflation is no longer primarily a demand phenomenon. The pandemic broke supply chains, war raised energy prices, climate change disrupted food, technological developments and trade fragmentation increased production costs. For Indonesia, rupiah depreciation can even bring inflation from outside when domestic demand is weak.

This creates a dilemma. Interest rates can suppress demand, but they cannot make rain fall, produce rice, or add a barrel of oil. Excessive tightening can actually weaken an economy already hit by a supply shock.

Second, the relationship between economic capacity and inflation is no longer easy to read. Changes in technology, demographics, work patterns and production structures continue to alter economic capacity. The American experience shows unemployment can be very low without producing as much inflation as previously estimated.

In its 2025 review, the Fed even emphasised that employment levels above the maximum employment estimate do not by themselves become a reason to tighten policy.

Third, interest rate transmission is increasingly less mechanical. The textbook relationship, policy rate →