Monetary Policy Framework in Indonesia
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.
What is the ITF? I Why the ITF? I How is the ITF applied?
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.