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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.