Monetary policy can influence a country’s rate of economic growth, employment, inflation, and currency exchange rates. If an economy is facing a downturn, the nation’s central bank would attempt to increase production, jobs, and consumer demand by cutting interest rates. This works to reduce the cost of credit and potentially increase the supply of money in circulation. Conversely, if there is runaway inflation, asset price spikes, or excessive lending taking place, policymakers will attempt to introduce demand. This will be done by moderating measures to restore economic and financial stability.
In Indonesia, monetary and exchange rate policy is conducted by the Bank Indonesia.
How does Monetary Policy work?
Indonesia's monetary policy measures during COVID-19
The goal of monetary policy is to maintain the stability of the rupiah, as evidenced by low and stable inflation. Bank Indonesia's key policy tool for affecting economic activity is the 7-Day (Reverse) Repo Rate, with the ultimate goal of lowering inflation.
As COVID-19 wreaked havoc on Indonesia's economy, Bank Indonesia called for better policy coordination with the government and other relevant institutions, all in the hopes of reducing the domestic sector's vulnerability to the international pandemic.
Bank Indonesia further cut foreign exchange reserve requirements and rupiah reserve requirements for commercial banks. Along with this, Bank Indonesia resorted to burden-sharing as part of its measure to manage inflation. To achieve this, the Central Bank purchased bonds in the primary market at Bank Indonesia’s discounted policy rate to gain control over the borrowing costs.
In the following months, Bank Indonesia will continue to keep a careful eye on the financial market and economic developments, notably the impact of COVID-19.
How does monetary policy impact investments?
The policies alter the supply of money in circulation and influence interest rates, affecting consumer and business confidence and their spending and investment decisions.
Key pitfalls of monetary policies
The policy's effectiveness could potentially be compromised due to:
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