The document summarizes the Central Bank of Indonesia (Bank Indonesia). It discusses Bank Indonesia's establishment, organization, leadership, monetary policy decisions, objectives, and instruments. The objectives are maintaining a stable Rupiah and achieving its inflation targets through using monetary policy instruments like open market operations, the BI rate (discount rate), and reserve requirements. Bank Indonesia aims to reduce inflation in the coming years to its target range of 3-5%.

1.
The Central Bank of Indonesia
Alvin Cahyadi
Albet Nego
Timothy Ruslie
William Halim Santosa
Emmeline Tjong

2. Table of Contents
● Introduction
1. Establishment
2. Organization
3. Monetary Policy Decisions
4. Leadership
● Monetary Policy
1. Background (interest rate, unemployment, exporter/importer)
2. Objective
3. Instruments
● Monetary Policy Statement
1. Global outlook
2. Domestic outlook
3. Inflation
4. Unemployment
5. Balance of risk (Expectations)
6. Policy Recommendation

3. Introduction
Establishment
Prior to being Bank of Indonesia the Indonesian central bank was an institution under the colonialist
Dutch Kingdom. It was called the De Javasche Bank (DJB) and was established on 24 January 1828. For
many decades DJB was controlled under the Dutch Kingdom rulers until the Japanese occupation
occurred and split the bank into many institutions, the DJB and other Dutch Banks. But, as of July 1953,
after Indonesia’s independence, DJB officially became Bank Indonesia as the Central Bank independent
of Indonesia.
Organization
Monetary Policy Decisions
The Board of governors meet on the first week of each month to discuss policy decisions. These decisions
are then released on a quarterly basis.
Leadership
Bank Indonesia is managed by the Board of Governors which is led by a Governor, assisted by a
Vice­Governor and four to seven Deputy Governors. Each member of the Board of Governors is
appointed for 5 year term and can only be reappointed to the same position not more than once. The
Governor, Vice­Governor and Deputy Governors are elected and appointed by the President with
approval of the House of Representative. They are responsible for the 4 departments; monetary
department, financial stability & payment system, internal management and both regional and
international offices.

4. Monetary Policy
Monetary Policy Formulation Process
Bank Indonesia, the Central Bank of the Republic of Indonesia, is responsible for planning and
implementing monetary policies. The process for deliberating and formulating monetary policy needs to
go through several levels. Materials are prepared at each meeting for the next, until the decision­making
process takes place at the Board Meeting.
1. It begins at the directorate level within Bank Indonesia and is taken forward in deliberations
within the Monetary Evaluation Committee (DKM) involving monetary and banking sectors.
2. The assessment of the latest conditions and economic forecasts is presented to the Board in the
Monetary Policy Committee (KEM), in which Board members in charge of monetary policies
meet with unit heads at Bank Indonesia to obtain a comprehensive picture of the economy.
3. In the Pre­Board Meeting, the Board of Governors and heads of Directorates in charge of
monetary affairs and banking deliberate the Bank Indonesia assessment of the macro economy
and the financial sector.
4. The Board of Governors Meeting follows the Pre­Board Meeting. Each Board member presents
his views of the macroeconomic conditions and the financial sector and discusses policy options.
The Board Meeting works through consensus to adopt a monetary policy decision in the form of a
BI Rate level.
The decision is made during the Board of Governors’ meeting, which is held on the first week of each
month. A comprehensive assessment of the latest progress in macroeconomic and policy conditions and
projections for the economy are made prior to the decision. For the meeting to be valid, more than half of
the Board of Governors needs to be present. Decisions are adopted through mutual deliberation to reach a
consensus. Otherwise, the Governor makes the final decision. However, in emergency situations, the
Governor and at least 2 Board members can make decisions. Under the Bank Indonesia Law, the
Governor of Bank Indonesia holds veto power in the meeting. To strengthen credibility and transparency,
a schedule for determining the monetary policy stance is announced to the public at the beginning of each
year.

5. Economic Background
Trade in Indonesia
As a developing country rich in natural resources, Indonesia is an exporter country and is the 24th largest
exporter in the world. Exports from Indonesia have increased from $167B in 2008 to $203B in 2013. The
most exported good is Coal Briquettes (11.3%), followed by Petroleum Gas (8.54%). The top export
destinations of Indonesia are Japan (14%), China (13%), the United States (9.3%), Singapore (9.1%), and
India (6.7%).
On the other hand, imports have increased from $127B in 2008 to $184B in 2013. The most imported
goods are Refined Petroleum (14.8%) and Crude Petroleum (7.16%), where the top import origins are
China (17%), Singapore (14%), Japan (9.5%), Malaysia (6.9%), and South Korea (6.4%).
Indonesia has had a positive trade balance since 1995. As of 2013, Indonesia had a trade balance surplus
of $19.3B in net exports. However, in recent years, the developments in Indonesia have caused the margin
between exports and
imports to shrink. From
2008 to 2013, the rate in
which imports have grown
(7.6%) is larger than that
of exports (4%).
However, due to the
recent years’ decline in
the growth of the
economy, Indonesia’s

6. exports have decreased. In late 2015, Indonesia’s had a trade balance deficit, but have recovered to a
surplus in the beginning of 2016.
GDP
In line with weaker global growth, the economy of Indonesia also slowed down in 2015. Accordingly,
domestic economic growth was projected at 4.8% annually, down from the 5.0% achieved in 2014. The
slowdown was caused by sluggish exports on the back of weaker global demand and lower commodity
prices. Such conditions were more
pronounced in regions reliant on natural
resources. In line with the continuously
weak export, limited investment growth
was also recorded. Nonetheless,
household and government
consumption remained in support of
economic growth.

7. Exchange Rate
The Rupiah has been on a decline since 2012 with an all time peak in late 2015 when IDR was nearing
Rp. 14,700 rupiah per USD. The Rupiah began to appreciate against the dollar (USD) beginning 2016.
Objective
Bank Indonesia’s main objective is to maintain a stable Rupiah value. Rupiah’s stability is defined as
stability of prices for goods and services reflected in inflation and also against other currencies. To
achieve this goal, Bank Indonesia decided to adopt the inflation targeting framework in 2005, 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. Thus,
Bank Indonesia also operates an exchange rate policy designed to minimise excessive rate volatility,
rather than to peg the exchange rate to a fixed level.
Since 2001, the actual rate of
inflation has failed to meet the
targeted inflation rate.
Bank Indonesia aims to reduce
inflation for the upcoming years.
The target inflation rate is set at
3­5% in 2015. 2016­ 2017 is
within the range of 3­5 % and
2.5­4.5% in 2018.
Monetary Instruments
On the operational level, these monetary objectives rely on the use of three main instruments: open
market operations, setting the discount rate, and prescribing a minimum reserve requirement. Bank
Indonesia may also apply monetary controls based on Sharia Principles.

8. Open Market Operations
Similar to the FED, Bank Indonesia has two open market operations (expansionary and contractionary).
They can sell and buy securities (Bank Indonesia Certificate/SBI) to influence the money supply. In fact,
Bank Indonesia usually uses this instrument to offset the fiscal policy that is made by government. For
instance, in 2013, Indonesian government raised the price of subsidized gasoline by 44 percent to 6,500
Rupiah ($0.65) a liter, while diesel is 22 percent higher at 5,500 Rupiah a liter.
Indonesia has been a net oil importer since
2004. Therefore, Indonesian government had to
increase the prices because they were bleeding
in their budget. According to the Societte
Generale Cross Asset Research, in 2013, while
oil prices stayed put, the rupiah depreciated
significantly, and as a result, the subsidy is
likely to have cost the government $25 billion,
more than 25 percent above the budgeted $19.3
billion. This caused them to raise fuel prices in
an attempt to ease the government budget deficit
which are primarily caused by costly oil
imports. However, this government decision
automatically created inflation. Any increase in
the price of fuel subsidized creates higher costs for numerous items, including food staples, clothing and
public transportation. In fact, annual inflation jumped from 5.9% in June to 8.6% in July 2013.
Looking at the rising of inflation
rate, Bank Indonesia continued to
hold open market operations by
issuing SBI in the second semester of
2013.The issuance of SBI was
expected to maintain monetary
stability and to reduce the
speculation in the money market
(control inflation). This example is
one of the Bank Indonesia efforts to
control surging inflation in 2013 due
to the increase in fuel price subsidies.
BI Rate (Discount Rate)
Another Instrument that Bank Indonesia used is discount rate (BI rate). BI rate is a credit facility granted
by the Bank Indonesia to commercial banks that should be guaranteed by securities and is adjusted to the
direction of the monetary policy. Bank Indonesia has decreased BI rates from 7.75% in January 2015 to
7.50% in February 2015. Furthermore, in the end of December 2015, Bank Indonesia decided to lower BI
rates again to 7.25% in January 2016 and 7.00% in February 2016 (the Jakarta Post, 2016).The purpose of

9. lowering BI rates is to boost the growth of bank credit in order to accelerate the national economy and
reduce the cost of capital for investments. With this reduction, Bank Indonesia also designed the
commercial banks to reduce lending rates in the coming 3­6 months. Thus, it helps the economy because
many projects in Indonesia currently require bank financing.
GWM (Reserve Requirement)
The last main monetary instrument is reserve requirement (GWM). It is one of the approaches that can be
used by Bank Indonesia to support the stability of the monetary and financial sector. Similar to the FED,
if Bank Indonesia wants to reduce the money supply, they can increase GWM. On the other hand, if Bank
Indonesia wants to increase the money supply, they can lower GWM. Recently, Bank Indonesia had
lowered GWM from 8% to 7.5% in the end of 2015. Then, they decreased it again to 6.5% in February
2016 (the Jakarta Post, 2016). Similar to the BI rate, the reason Bank Indonesia lowered the GWM is to
inject liquidity into the bank systems in
which banks could use to boost their
lending activity for at least the next one
to three month. In the end, the increase in
demand for this credit (especially to the
real sector) will boost the economic
growth. By lowering GWM and BI rate
in February 2016, Bank Indonesia
expects that it will foster a loan growth of
14% and the economic growth will be
around 5.2%­5.6% this year.
Monetary Policy Statement
In order to make an accurate monetary policy decision, it is critical to consider to economy situation in the
world as well as in domestic level. In addition, economy indicator such as future expectation for
unemployment and inflation should also be included into consideration of creating monetary policy
decision.

10. Global Outlook
Recently, there are 4 events that become Bank Indonesia’s concerns. Those are the raise in Federal Funds
Rate (FFR), low global commodity prices, weak economic growth from trading partners, and low global
oil prices.
Raise in Fed Funds Rate
The United States Federal Reserve’s decision to raise the interest rate eliminates the uncertainty in the
global financial market. The Bank Indonesia fears that the United States Federal Reserves would increase
the rate too high, which will impact significantly to the attractiveness of Indonesia as investment
destination. The United States Federal Reserves decision to raise the fed funds rate by 25 basis
points—and then gradually to the normal level afterwards—sends relief to Bank Indonesia. After the
announcement, in September 2015 through February 2016 Bank Indonesia decided to lower their interest
rate gradually to 7%. In the future, Central Bank of Indonesia needs to monitor the magnitude of the
change in Fed Funds Rate, while keep expanding the economy through expansionary monetary
policy­­specifically by further lowering interest rate. Indonesia would capitalize on this diminishing
uncertainty to establish a robust economic growth, thus a stronger Rupiah.
Low Commodity Prices
As a country that relies on natural resources to boost its economy, the low commodity prices affects
Indonesia greatly. This caused exports to drop in 2015, and a trade balance deficit. The world commodity
prices are still at low level in early 2016, which hinders Indonesia from increasing its export value. It
seems the low price will remain for a while because global economic recovery has not shown a significant
progress. Indonesia’s export performance lie heavily on Crude Palm Oil (CPO), in which price is
projected to increase due to pressure in supply side from El Nino. Nevertheless, the low palm oil prices
will still create a huge pressure for Indonesian exports because Indonesia exports 51% of the world’s
palm oil supply. Although the price of palm oil just started to increase due to agreement of production cap
from the exporter countries, a deviation is very likely to happen. Therefore, export sector may not have a
good prospects in 2016.
Weak Economic Growth and China’s Volatile Economy
The slow recovery of other countries’ economy also contribute to Indonesia weak export performance.
U.S. economy showed weak retail sales and personal expenditure, added by contraction in the
manufacturing sectors. U.S. retail sales growth fell from 2.2% in September 2015 to 1.4% in December of
the same year, while personal expenditure dropped from 3.1% to 2.5% over the same period. This
situation is projected to continue throughout 2016 and would make Indonesian commodities to have less
demand in the U.S. market. However, recent visit of President Joko Widodo for U.S.­ASEAN summit
may improve Indonesian exports to the United States in late 2016. The U.S.­ASEAN summit includes an
agreement of joint efforts to improve prosperity and connectivity of the two parties’ economy, thus
appreciating the Rupiah. Similar effect also happened due to the low level of inflation in European
market. Europe’s economy recovery is boosted by strong domestic demand. European Central Bank also
has implemented loose monetary policy stance to boost credit growth and money supply to further support
consumption. Even so, all of these improvements in the Europe’s consumption still failed to increase
inflation because cheap fuel prices lowered production cost and commodity prices.

11.
From Asia region, Japan’s weak economy situation especially in retail sales, also impacts negatively to
Indonesia’s export. However, Japan just recently implemented negative interest to their economy, which
can be the catalyst to improve consumption and thus improve Indonesian export sector in 2016. The
recovery of the economy would allow Bank Indonesia to reach its objective to stabilize the Rupiah’s
value.
However, a more serious concern comes from China economy, which shows economic moderation
despite monetary and fiscal stimuli, coupled with supply­side reforms. In January 2016, China reported a
11.2% decline in export and 18.8% decline in import. As one of the biggest Indonesia’s trading partners,
China’s low level of import may result to current account deficit to Indonesia because of significant
reduction in export. Additionally, the depreciation of RMB may also cause depreciation to Rupiah
because China becomes better alternative for investment (capital outflows).
Low Oil Prices
The low global oil price affects Indonesia positively and negatively, As a country that exports a lot of
unrefined petroleum, low oil price makes Indonesia’s export value to diminish. Nevertheless, Indonesia
also imports a lot of refined petroleum for domestic consumption. Low oil prices, as a result, makes
Indonesia’s export value to lower. Out of these two effects, the effect on import shows a greater impact to
Indonesia’s current account since oil is Indonesia’s biggest imported item. At the same time, Indonesian
government’s subsidy program for oil consumption benefits a lot from this. Low oil prices makes
government’s subsidy for oil to be much lower than previous year.
Domestic Outlook
For domestic economy situation, Indonesia needs to pay attention to the weak performance in GDP and
the potential in the financial sector.
Gross Domestic Product (GDP)
As previously mentioned, Indonesian economy
growth did not show a good result in 2015,
reflected by the weak GDP due to low
commodity prices. Despite in the last quarter of
2015 Indonesia achieved 4.73% GDP growth,
the GDP is still below 2015 target. In 2016 the
government will be reducing energy subsidies
and reallocating resources to infrastructure and
education. As a result, Indonesia’s economic
growth for 2016 is projected in the range of
5.2­5.6%, mostly supported by government’s
fiscal stimuli. Meanwhile, private consumption
is expected to be relatively stable despite a decrease in disposable income and private savings. Stability in
private consumption is shown by strong sales for motor vehicles and cement— two commodities that are
commonly used to measure Indonesia’s consumers’ consumption behavior. Investments in private and

12. public sector represented by cement sales have also been increasing rapidly since year end of 2015 which
shows high business confidence in 2016.
Financial Sector
Even though Indonesia’s export sector is slowing due to low demand and commodity prices, Indonesia
has become an attractive investment for many foreign countries. It has currently taken over India as the
number 2 investment destination in Asia. Furthermore, President Joko Widodo plans to continue on
implementing policies to attract foreign investors to Indonesia. These policies include tax holidays and
expedited documents services, which have been implemented since early September 2015 and will
continue throughout 2016. Due to this, rating agencies such as Fitch, S&P and Moody improved their
opinion on Indonesia. Fitch rated Indonesia at BBB­ and commented that the recent wave of reform
initiatives from the government may improve business sentiment. Similar comments also come from S&P
and Moody’s which show confidence to the Indonesian government’s stimulus program to improve
Indonesia’s economy.
Besides from rating agencies, international institutions also show optimism toward Indonesia’s economy,
despite there is still downside risk in 2015. International Monetary Fund (IMF) commented that the
medium­term prospects are favorable, supported by an inclusive growth­enhancing policy agenda which
also emphasis on stability. IMF forecasted that Indonesia’s economic growth will reach 5% in 2016 and
inflation will fall further after falling to level of 3% in 2015.This momentum of increasing foreign
investment to Indonesia will be a detrimental factor to stimulate Indonesia’s overall consumption and
production.
Inflation
Inflation over the past 5 years have varied with high inflation around mid 2013 till mid 2014 and lowest
during 2012. In 2015, inflation was recorded at 3.35% year on year, which is lower than 2014 inflation
and in line with the target inflation
of 3%­5%. The inflation target
was achieved as a result of low
level for each of the inflation
components. Volatile food
inflation was at 4.84% year on
year in December 2015 which
happened because of consistency
in food supplies, despite the
severity of El Nino weather
phenomenon. Administered prices
is recorded at 0.39% year on year,
as global energy prices dropped
against a backdrop of oil and gas
reforms. Core inflation was also recorded low at 3.95% year on year, which is the lowest for the last 5
years. The low core inflation happened because Indonesian Central Bank successfully managed domestic
demand, maintain stability in exchange rate, as well as managing market expectation on inflation. Due to

13. this recent success, Central Bank of Indonesia is confident to reach the inflation target for the following
years. Households consumption is expected to gain significant benefit in 2016 because of this lower
targeted inflation.
Unemployment
Indonesia unemployment rate showed a significant jump from 5.81% to 6.18% on the last quarter of 2015.
This increase in unemployment rate is due to the slow private consumption that has been occurring
throughout 2015. In the future, this unemployment rate is expected to drop as Indonesia central bank has
further lowered the Bank
Indonesia Rate. With lower rate,
this will stimulate businesses to
borrow and expand, which will
generate more job opportunity.
Additionally, in 2016, the
employment is expected to be
supported by the increase in
government spending, which will
increase economic activity in
Indonesia.
Balance of risk
Balance of Risk regarding interest rate weighs upon the inflation rate and economic growth of a country.
As what is mentioned previously, Indonesia’s interest rate decisions are decided by Bank Indonesia.
Similar to the FED, the official interest rate is the Discount Rate. This rate acts as a benchmark to other
interest rates such as the mortgage rate and prime lending rate. The central bank of Indonesia manipulates
this interest rate to achieve its economic goals such as inflation rate and economic growth rate.
In February 2016, Indonesia’s central bank decided to cut its benchmark interest rate by 0.25% to 7% in
response to the sluggish economic growth.
The decrease in interest rate is done in the
hope of boosting economic growth through
consumption and investment spending. In
addition, reserve requirement ratio is also
slashed by 100 basis points to 6.5% in the
hope of stimulating GDP through the
increase of money supply
circulating in the economy.

14. These policies are in line not only in the aspect of economic growth alone but also inflation rate. These
expansionary policies creates a negative effect toward inflation. Economic growth can be expected to
increase significantly through these policies, but it increases money supply, which in turn increases
inflation. The central bank has been very careful with their decisions to boost economic growth through
interest rates and required reserves rate while at the same time keeping inflation in control.
The decision to slash interest rate in January 2016 is supported by a solid macroeconomic stability
especially in regards to inflation. Inflation in 2015 is reported to be at 3.35%. This rate is within the
window target rate of 3­5%. Hence, it provides some room for inflation due to the increase in money
supply. The central bank will continuously coordinates with the Government through fiscal policies to
control inflation and accelerate economic growth (output) while maintaining macroeconomic stability.
Economic growth in 2015 is estimated to be 5.04% (yoy) up from 4.74% in the previous period. These
growth is supported by the Government’s spending on local elections and investments on infrastructure
under the new president. However, the role of private sector is still weak with low consumption and
investments.
Through the policies that have been implemented, Indonesia’s economy is projected to grow at a rate of
5.2­5.6%, supported by government as well as private sectors investments and spendings. The
government has been trying its best to increase economic growth through government spending in many
projects such as the establishment MRT and LRT in Jakarta, the capital city of Indonesia. Moreover,
private investments is expected to pick up after recent government deregulation and tax holiday.
Policy Recommendation
Our policy recommendations combat economic slowdown while, at the same time, keeping inflation and
exchange rate under control. We recommend Bank Indonesia to decrease BI rate further using two
instruments:
1. Buying of government bonds. As government buys
bond from public, money supply in circulation will
increase.
2. ​Decreasing Reserves Requirement. The decrease in
reserve requirement allows bank to lend more money
to the public. This creates a ripple effect of an
increase in spending and investment, hence an
increase in money supply.
These two policies would propel short run and long run effects in the economy​.

15. Short Run Effects
1. In the short run, the increase in money supply would cause interest rate to decrease. Assuming that
the exchange rate (E) is against the dollar (USD), this will cause a depreciation of Rupiah as the
exchange rate (E) goes up.
2. We also expect money demand in the near future to increase. The increase in money demand is
supported by many huge spendings that the government is expected
to incur to build infrastructures such as Metro Rapid Transportation,
Bus Way, and Electronic Road Pricing. Furthermore, we also
expect an increase in money demand through private sectors in
terms of investment and consumption due to a decrease in cost of
lending and the recent deregulations that the new government has
done to spur more new businesses in the country. The increase in
money demand will increase the interest rate and an appreciation of
Rupiah. The exchange rate (E) goes down and this would counter
effect the depreciation caused by an increase in money supply.
These two effects will offset each other in terms of interest rate and the
exchange rate. Thus, our recommendations will allow us to realize our objectives of maintaining the value
of the Rupiah and also stimulating economic growth.
Long Run Effects
In the long run, the price level is expected to increase in effect of the increase in money supply. As Price
increases Ms/P would shift back to its initial level and interest rate would automatically stabilize as it goes
back up after spurring economic growth.
We are not concerned in regards to an increase in inflation rate in the long
run because Indonesia’s inflation rate in 2015 is still coming in low at
3.35%. This rate is at the lower bound of the inflation rate window of
3­5% set by the central bank. We believe that Indonesia still has some
room for inflation. Also, we believe inflation rate will still be in control
due to the low global energy and commodity prices.

16. QUESTIONS:
1)​ ​Why did the central bank of Indonesia recently slashed its BI rate?
To stimulate economic growth
2)​ ​What is Indonesia’s main commodity for export?
Coal

17. References
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Ayomi Amindoni, (2016, January 12) Web. Indonesia remains cautious over Chinese economy.
(China effect on Indonesia’s economy) from
​http://www.thejakartapost.com/news/2016/01/12/indonesia­remain
Kundu,K.K,(2014, March 13). On our Minds Indonesia: The perils of oil subsidies.
Societte Generale Cross Asset Research. Retrieved February 25, 2016 from
https://publication.sgresearch.com/en/1/0/202911/138085.html?sid=c40166bb876322750b8cc079
a18bfe03
Indonesia. Bank Indonesia. Web. <http://www.bi.go.id/en/>
Indonesia, OEC. (2015) Web. Indonesia Exports, Imports and Trade Partners.
http://atlas.media.mit.edu/en/profile/country/idn/
Tan, Huileng. "China Exports Fall 11.2% in January, Imports down 18.8%." ​China Exports Fall 11.2% in
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us­dollar­imports­and­exports.html>