Bank Indonesia strengthens stabilization efforts through FX and bond purchases

Bank Indonesia strengthens stabilization efforts through FX and bond purchases

Indonesia's central bank, Bank Indonesia (BI), has stepped up its stabilization efforts by engaging in foreign exchange (FX) purchases and government bond acquisitions. This strategic move aims to support President Prabowo Subianto's economic agenda, particularly initiatives such as low-cost housing and village cooperatives.

BI has been purchasing government bonds in the secondary market and sharing some of the interest income with the Ministry of Finance. This arrangement, known as burden sharing, involves calculating the difference between the 10-year government bond yield and the government's deposit rate. Half of this difference is then handed over to the Ministry of Finance [1].

The central bank's latest initiative comes as part of its expansionary monetary policy, intended to inject liquidity into the financial system and maintain low interest rates. This policy aligns with BI's broader goal of supporting economic growth while ensuring financial stability.

While the details of the plan remain somewhat vague, the scheme has been welcomed for its potential to reduce the government's financing burden. Critics, however, have raised concerns about the risks of fiscal dominance, where monetary policy becomes subordinated to fiscal needs, potentially eroding investor confidence [2].

The market's reaction to BI's secondary market bond purchases has been mixed. On one hand, the purchases have helped stabilize the rupiah amid global headwinds. On the other hand, government bond yields have risen, reflecting heightened borrowing costs and investor skepticism about fiscal sustainability [2].

The Indonesian Parliament's role in overseeing fiscal legitimacy and BI's transparency in communicating policy trade-offs will be critical in ensuring the scheme's long-term viability. As Indonesia navigates this complex policy landscape, stakeholders must remain vigilant to maintain macroeconomic stability and preserve investor trust.

References:
[1] https://www.bloomberg.com/news/articles/2025-09-03/bank-indonesia-shoulders-some-debt-costs-of-prabowo-s-programs
[2] https://www.ainvest.com/news/central-bank-fiscal-coordination-indonesia-opportunities-risks-investors-2509/