The overriding objective of monetary policy is to safeguard and maintain stability in the value of the rupiah, reflected among others in low, stable inflation. To this end, Bank Indonesia sets a policy rate known as the BI Rate, which serves as the primary instrument for influencing economic activity with the overriding objective of achieving the desired level of inflation. However, the transmission of BI Rate decisions to achievement of the inflation target operates through highly complex channels and is subject to time lag.

The means by which BI Rate adjustments influence inflation is commonly referred to as the monetary policy transmission mechanism. This mechanism reflects the actions taken by Bank Indonesia through adjustments in monetary instruments and operational target with effect on a range of economic and financial variables before ultimately influencing inflation as the final objective. This mechanism operates through interaction between the central bank, the banking system and financial sector and the real sector. Changes in the BI Rate influence inflation through various channels, among others the interest rate channel, credit channel, exchange rate channel, asset price channel and expectations channel.

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To achieve the overriding monetary policy objective, Bank Indonesia has implemented a monetary policy framework for management of interest rates (interest rate target). The policy rate, commonly known as the BI RATE, is adopted in the Board of Governors Meeting at Bank Indonesia. At the operational level, the BI Rate is reflected in movement in the Interbank Overnight (O/N) Rate.

The interbank money market is the activity of lending and borrowing money between one bank and another bank. An interbank rate represents the price formed in a deal between parties lending and borrowing funds. Activity on the interbank is conducted over the counter (OTC) through deals between borrowers and holders of funds arranged without passing through an exchange floor. Interbank tenors range from one working day (overnight) to one year.




If movement in the overnight interbank rate does not vary far from the anchor (the BI Rate), Bank Indonesia will work consistently to safeguard and fulfil the liquidity needs of the banking system while maintaining the equilibrium for formation of fair, stable interest rates. The liquidity needs of the banking system are estimated by taking into account autonomous factors such as government operations, maturity of OMO instruments and standing facilities and changes in currency outside banks. These factors can have an expansionary or contractionary impact on money market liquidity.

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Monetary policy can only operate effective with open communications between Bank Indonesia and the public. For this reason, Bank Indonesia works consistently to ensure that monetary policy is communicated to the public in a transparent manner. These communications also represent part of monetary policy accountability and play a role in shaping public expectations of future inflation. Bank Indonesia encourages the public through these communications to perceive and shape future inflation in keeping with the stance adopted in the published target. Monetary policy is therefore communicated on an ongoing basis through announcements and explanations of the future inflation target, Bank Indonesia analysis of the economy, the working framework, past and future monetary policy actions, the schedule for the Board of Governors Meetings and other matters as determined by the Board of Governors.



Monetary policy communications are issued in press releases, press conferences after Board Meetings, publication of the Monetary Policy Review/Report presenting the background to decisions made and explanations provided directly to the public, media, economic actors, market analysts and academics.

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The BI Rate is announced by the Board of Governors of Bank Indonesia in each monthly Board of Governors Meeting. It is implemented in the Bank Indonesia monetary operations conducted by means of liquidity management on the money market to achieve the monetary policy operational target.

The monetary policy operational target is reflected in movement in the Interbank Overnight (O/N) Rate. It is then expected that bank deposit rates will track the movement in interbank rates, with bank lending rates following suit.

While other factors in the economy are also taken into account, Bank Indonesia will normally raise the BI Rate if future inflation is forecasted ahead of the established inflation target. Conversely, Bank Indonesia will lower the BI Rate if future inflation is predicted below the inflation target.

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In simple terms, inflation is understood as a persistent, ongoing rise across a broad spectrum of prices. An increase in prices for one or two goods alone cannot be described as inflation unless that increase spreads to (or leads to escalating prices for) other goods. The reverse of inflation is deflation.

The indicator commonly used to measure the level of inflation is the Consumer Price Index (CPI). Changes in the CPI over time are indicative of price movements for packages of goods and services consumed by the public. Since July 2008, the packages of goods and services in the CPI basket have been based on the 2007 Cost of Living Survey conducted by the Statistics Indonesia (BPS). Following this, BPS monitors price movements for these goods and services in selected cities and towns each month, using information from traditional markets and modern retail outlets on specific categories of goods and services in each location.

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The monetary policy stance is adopted by Bank Indonesia in the Board of Governors Meeting. This meeting convenes in the first week of each month for a comprehensive assessment of the latest developments in macroeconomic and policy conditions and of projections for the economy, including inflation.

The Board Meeting is valid if attended by more than half of the members of the Board of Governors. Decisions in a Board meeting are adopted through mutual deliberation to achieve a consensus. If the meeting fails to reach a consensus, the Governor shall adopt a final decision.





Nevertheless, in the event of an emergency and the Board Meeting is unable to convene for lack of quorum, the Governor or at least 2 (two) Board members may adopt policy and/or make decisions.

To strengthen the credibility and transparency of monetary policy, a schedule for determining the monetary policy stance is announced to the public at the beginning of each year.

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