Monetary Policy Objectives
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.