Bank Indonesia and Inflation - Bank Sentral Republik Indonesia
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December 02, 2020
​Inflation Control

The purpose of Bank Indonesia monetary policy is to manage pressure on prices from aggregate demand (demand management) relative to supply side conditions. The aim of monetary policy is not to respond to inflationary spikes arising from factors representing temporary shocks that will dissipate on their own with time.

Inflation is also influenced by supply side factors or even shocks such as increases in world oil prices, harvest failures or floods.

In the CPI basket weightings, the inflationary components susceptible to shocks are represented by the volatile foods and administered prices categories, which make up about 40% of the CPI. For this reason, the ability of Bank Indonesia to control inflation is severely constrained during times of major shocks, such as the fuel price hikes in 2005 and 2008 that triggered a surge in inflation.

Considering that the inflation rate is also influenced by these shocks, achievement of the inflation target necessitates cooperation and coordination between the Government and BI within an integrated macroeconomic policy involving fiscal, monetary and sectoral policies. Furthermore, the susceptibility of inflation in Indonesia to supply-side shocks necessitates specific policies to address these issues.

At the technical level, the government and BI have established a coordination mechanism with the formation of the ministerial level Inflation Targeting, Monitoring and Control Team (TPI) in 2005. The TPI members include Bank Indonesia and technical ministries, such as the Ministry of Finance, Coordinating Ministry for the Economy, National Development Planning Agency, Ministry of Trade, Ministry of Agriculture, Ministry of Transportation and Ministry of Manpower and Transmigration. Given the importance of this coordination, TPI was expanded to the regional level in 2008. Looking forward, the Government and BI envisage even more effective coordination with the support of the TPI forum at the ministerial and regional levels in order to bring about low, stable inflation as a platform for sustainable economic growth.

 
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