Bank Indonesia urges fiscal-monetary coordination amid global supply crisis

BI calls for stronger fiscal-monetary coordination

Bank Indonesia has urged stronger coordination between fiscal and monetary policy to protect national economic stability and sustain growth as geopolitical tensions and financial market turbulence intensify worldwide.

Governor Perry Warjiyo, who has led the central bank since 2018 and is currently serving his second five-year term through 2028, warned on Wednesday that global market pressures have resurged following the collapse of the US-Iran ceasefire in early July 2026.

The conflict, which began on February 28, 2026, when US and Israeli forces launched strikes against Iran that killed Supreme Leader Ali Khamenei during nuclear negotiations, had briefly subsided under a temporary truce. That ceasefire ended abruptly on July 7, 2026, after three vessels were attacked in the Strait of Hormuz on July 6-7, prompting President Trump to declare the truce over and escalate military operations.

Critical chokepoint paralyzed

The Strait of Hormuz, which normally carries approximately 20 million barrels of oil per day—roughly 34% of globally traded crude oil and 20% of world liquefied natural gas trade—has seen traffic plummet to below 10% of pre-war baseline volumes following the resumption of hostilities. With 91% of Gulf crude exports destined for Asian markets, the disruption has hit the region particularly hard.

The International Energy Agency has characterized the 2026 closure as the largest supply disruption in the history of the global oil market, surpassing even the 1973 OPEC embargo.

Traffic in the Strait of Hormuz has been disrupted again, affecting production and trade supply chains between countries, and the price of oil and various global commodities has rebounded.

Warjiyo said during a virtual press conference.

The central bank projects global economic growth will remain subdued at 3 percent in 2026, while global inflation is expected to climb to around 4.5 percent. This inflationary environment has prompted central banks worldwide to maintain tight monetary stances, with the US Federal Reserve anticipated to raise the Fed Funds Rate in early Q4 2026.

In bond markets, yields on US Treasuries surged on July 20, 2026, with 10-year notes hitting 4.56 percent and 2-year notes reaching 4.18 percent, driven by a widening US fiscal deficit. The resulting global capital flight from emerging markets toward US safe-haven assets has significantly strengthened the dollar against both developed and emerging market currencies.

Domestic resilience

Despite these external headwinds, Warjiyo emphasized that Indonesia's economic foundation remains solid, anchored by robust domestic demand. Indonesia's economy expanded 5.11% in 2025, up from 5.03% in 2024, according to BPS-Statistics Indonesia.

Second-quarter activity was bolstered by strong public consumption, supported by civil servant salaries and social assistance disbursements, alongside stable household spending cushioned by food aid, transit subsidies and vocational programs. Investment was primarily anchored by construction projects linked to the National Priority Work Program, though private investment requires further encouragement. Growth was sustained across manufacturing, construction, transportation and warehousing sectors.

To mitigate ongoing external risks, the central bank confirmed it will align its monetary, macroprudential and payment system strategies closely with government programs to maintain stability and foster long-term growth.

Bank Indonesia estimates that Indonesia's economic growth in 2026 will remain strong, in the range of 4.9 percent to 5.7 percent.

Warjiyo concluded.

The United Nations Conference on Trade and Development warned in July 2026 that the full economic impact of Strait of Hormuz disruptions may not become clear until the second half of 2026, with consequences extending beyond energy to transportation, agriculture, and fertilizer supply chains.