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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Whether as a public legal entity or as civil legal entity, the position of Bank Indonesia is regulated by the statutes. As a public legal entity, Bank Indonesia has the authority to issue policy rules and regulations, which are binding to the public - at - large. As a civil legal entity, Bank Indonesia is able to represent itself in and outside the court of law.

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To implement monetary policy, Bank Indonesia has opted for a working framework known as the Inflation Targeting Framework (ITF). This framework was formally adopted in July 2005, and replaces the previous monetary policy using base money as the monetary policy target.

Under this framework, Bank Indonesia explicity announces the government-set inflation target to the public and monetary policy is geared towards achievement of this target. For the inflation target to be reached, monetary policy is implemented with a forward-looking approach, meaning that any change in the monetary policy stance is undertaken after evaluating whether future developments in inflation are on track with the established inflation target.



Under this framework, monetary policy also operates with transparency and accountability to the public. At the operational level, the monetary policy stance is reflected in the setting of the policy rate (BI Rate) with the expectation of influencing money market rates and in turn the deposit rates and lending rates in the banking system. Changes in these rates will ultimately influence output and inflation.

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The goal of Bank Indonesia is to achieve and maintain the stability of the rupiah. This goal is stipulated in article 7 of Act No. 3 of 2004 concerning Bank Indonesia.

Rupiah stability is defined, among others, as stability of prices for goods and services reflected in inflation. To achieve this goal, Bank Indonesia decided in 2005 to adopt the inflation targeting framework, in which inflation is the primary monetary policy objective, while adhering to the free floating exchange rate system. Exchange rate stability plays a crucial role in achieving price and financial system stability. For this reason, Bank Indonesia also operates an exchange rate policy designed to minimise excessive rate volatility, rather than to peg the exchange rate to a particular level.



To carry this out, Bank Indonesia holds powers to conduct monetary policy through the establishment of monetary targets (such as money supply or interest rates) with the primary goal of keeping inflation at the government-prescribed level. On the operational level, these monetary objectives rely on the use of instruments, including open market operations on the rupiah and forex money markets, setting the discount rate, prescribing a minimum reserve requirement and regulating credit or financing. Bank Indonesia may also apply monetary controls based on Sharia Principles.

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Bank Indonesia Code of Conduct is a standard guideline which reflects the integrity of Bank Indonesia Employees. Any Bank Indonesia Employee shall be responsible not only for understanding this Code of Conduct but also for applying it in daily activities.

1. Any Employee is not allowed to abuse position, authority, and/or facility provided by Bank Indonesia.

2. Any Bank Indonesia Official is required to report his/her wealth to Bank Indonesia and/or the Corruption Eradication Commission (KPK).

3. Any Employee is not allowed to ask for/receive, give approval to receive, permit or let family to ask for/receive facility and/or other matters of monetary value from individual person or institution which is recognized or reasonably suspected to have relation either directly or indirectly with the concerned Employee’s position or job.

4. Any Employee is required to keep Bank Indonesia secrecy for matters categorized confidential.

5. Any Employee is not allowed to become member, organizer of political party, and/or to conduct activity for the interest of political party

Any Employee proven to commit violation of this Code of Conduct shall be liable to sanction(s) in accordance with applicable provision.

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A new chapter in the history of Bank Indonesia as an independent central bank was initiated when a new Central Bank Act, the UU No. 23/1999 on Bank Indonesia, was enacted on May 17, 1999 and have which has been amended with UU No.3/2004 on January 15, 2004. The Act confers it the status and position as an independent state institution and freedom from interference by the Government or any other external parties.

As an independent state institution, Bank Indonesia is fully autonomous in formulating and implementing each of its task and authority as stipulated in the Act. External parties are strictly prohibited from interfering with Bank Indonesia's implementation of its tasks, and Bank Indonesia has the duty to refuse or disregard any attempt of interference in any form by any party.





Such unique status and position are necessary so that Bank Indonesia can implement its role and function as monetary authority more effectively and efficiently.

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Bank Indonesia is the central bank of The Republic of Indonesia. Bank Indonesia is currently governed by Darmin Nasution, former interim governor. The last governor before the interim phase, Boediono, resigned due to his vice presidential candidacy in the Indonesian presidential election. Darmin Nasution was sworn in by President Susilo Bambang Yudhoyono on September 1, 2010.
Finance Minister Sri Mulyani Indrawati was proposed as a candidate to take over the Bank Indonesia governorship earlier in 2009.

Bank Indonesia was founded on 1 July 1953 from the nationalization of De Javasche Bank, a Dutch bank dating from colonial times.
For the next 15 years, the Bank of Indonesia carried on commercial activities as well as acting as the nation’s bank.
This came to an end with the Law No.13/1968 on the Central Bank, which was subsequently replaced by Law No.23/1999, freeing the bank from government interference.
Thereafter, the bank reported to the parliament (People's Representative Council) instead of the president, and the bank’s governor was no longer a member of the cabinet.

Organization

The bank is led by the board of governors, comprising the governor, a senior deputy governor and at between four and seven deputy governors.
The governor and deputy governors serve a five year term ,and are eligible for re-election for a maximum of two terms.
The governor and senior deputy governor are nominated and appointed by the president, with approval from the People's Representative Council. Deputy governors are nominated by the governor and appointed by the president, with approval of the People's Representative Council.
The president has no power to dismiss a member of the board, except when a board member voluntarily resigns, is permanently handicapped, or is proven guilty of criminal offence.
The Board of Governors Meeting is the bank’s highest decision-making forum.

Strategic objectives

The Bank describes its strategic objectives as being :

1. Maintain monetary stability
2. Maintain the financial sustainability of the Bank of Indonesia
3. Strengthen the effectiveness of monetary management
4. Create a sound and effective banking system and financial system stability
5. Maintain the security and effectiveness of the payment system
6. Increase the effectiveness of Good Governance implementation
7. Strengthen the organization and build highly competent human resources with the support of a knowledge-based work culture
8. Integrate the Bank of Indonesia's transformation in line with Bank Indonesia's destination statement of 2008

It operates 37 offices across Indonesia, and four representative offices in New York, London, Tokyo and Singapore

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