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View all search resultsMonetary policy credibility: Is independence a necessary condition?
Some are insisting that the new governor must be independent, which usually gets defined, rather narrowly, as someone able to say no. It is worth asking whether that is really the binding condition.
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State Secretary Prasetyo Hadi, third right, accompanied by Bank Indonesia deputy governors, speaks during a press conference on the resignation of Bank Indonesia governor Perry Warjiyo in Jakarta on July 27, 2026. (Antara/Marco)
T
wo recent events have brought Bank Indonesia's (BI) credibility into question. The first is changes in how it is supervised. The second is the abrupt departure of its governor. These have put independence back in the spotlight, at an awkward moment. The capital markets have been through a period of upheaval, elevated oil prices have put the budget under pressure and questions on policy coherence raised by several rating agencies still linger.
Hence the pressure on the government to pick a new governor.
Some analysts are insisting that the new governor must be independent, which usually gets defined, rather narrowly, as someone able to say no.
It is worth asking whether that is really the binding condition. There are a few central banks that sit inside the executive branch and are perfectly credible.
Our own history is a good place to start. During the New Order, BI operated under a Monetary Board chaired by the finance minister, with a crawling peg exchange rate regime. Given the standing of its governors and the quality of the policy team around them, it was considered credible for a long stretch. Then, toward the end, it was asked to finance politically connected projects, and the liquidity support after 1997 became a scandal of its own. The 1999 law was written as the answer to that.
Evidence from that period is, therefore, instructive for the questions of independence. A government controlled central bank can be credible for years. But then it loses that credibility rapidly once the political arrangement and the particular group of people holding it up are gone. Political hands off and personal standing work but only while they are in place.
Singapore is an interesting case, its central bank is considered very credible. And yet it is chaired by the deputy prime minister and the board answers to parliament. It is understood to have operational rather than institutional independence. It is credible enough that Singapore borrows at a premium of AAA.
