1

Wahyu Agung Nugroho, PhD

Director

Central Bank Policy Mix Seminar

Bali, July 4th 2023

ECONOMIC AND MONETARY POLICY DEPARTMENT

 2

Evolution of Monetary Policy

1
Framework

2 BI’s Policy Mix Framework

Challenges and BI’s Policy Mix

3
Experiences

ECONOMIC AND MONETARY POLICY DEPARTMENT

KEY MESSAGES 33

1. Uncertainty and complexity are inevitable for central banks moving forward.
Changes in the strategic environment, such as accelerated digital transformation and challenges beyond
stability, accompanied by elevated uncertainty, have created new and more complex economic challenges.

2. Efforts to Strengthen Central Bank Policy Mix Framework Continues in the Post-COVID Era.
After the Covid-19 pandemic, the central bank's determination to fortify the policy framework persists.
Recognizing the evolving economic landscape, the central bank remains committed to adapting and refining its
policies to address emerging challenges both in maintaining stability and supporting economic recovery.

3. Strengthening Policy Coordination between The Central Bank and The Government is a Sufficient
Condition in maintaining economic recovery while safeguarding stability to achieve sustainable
economic growth.
Facing the complexity of the problem and the interconnectedness among different authorities, the central bank
must put extra effort to strengthen policy coordination and institutional arrangements. This include promoting
new sources of growth to support a broader economic recovery. Emphasizing Independence within the
Interdependence is a must.
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Evolution of Monetary Policy

1
Framework

2 BI’s Policy Mix Framework

Challenges and BI’s Policy Mix

3
Experiences

ECONOMIC AND MONETARY POLICY DEPARTMENT

THE EVOLUTION OF MONETARY POLICY FRAMEWORK 55

• After the GFC, the Inflation Targeting Framework has been modified to be more flexible and integrated
• After the Covid-19, the efforts to strengthen the monetary policy framework continues…

GLOBAL
1ST ITF FINANCIAL CRISES
COVID19
IMPLEMENTATION PANDEMIC

UNCONVEN- CAPITAL FLOW FINANCIAL ITF ADOPTED BY

ASIAN TIONAL SURGES STABILITY 40 COUNTRIES
MONETARY
CRISES POLICY
TO EM CONCERN
(AREAER)

Strict ITF Flexible ITF Integrated ITF What ‘s Next?

1990 1998 2008 2015 2020 2022

38 40
34 34 36
32
25 26
23
18 20
11 13
7 8
5
2
NEW 1 NEW ZEALAND
ZEALAND CHANGE THE ACT
1990
1990 1995
1995 2000
2000 2005
2005 2010
2010 2015
2015

Number of countries adopting ITF

LESSONS FROM GLOBAL FINANCIAL CRISIS: IMPORTANCE OF FINANCIAL STABILITY 66

Central bank could not focus only on maintaining price stability. Financial pro-cyclicality & systemic risk accumulation in the economic boom
period often leads to subsequent financial crisis.

1. Individual soundness of financial institution is ‘necessary but not sufficient’ for financial stability.
The need to better understand macro-financial linkages that lead to financial pro-cyclicality & accumulation of systemic risks.
2. Financial pro-cyclicality in the economic boom period pose serious risks to systemic crisis:
 Factors to pro-cyclicality: financial accelerator (Bernanke, Gettler & Gilchrist, 1999; Kiyotaki & Moore, 1997), financial
deregulation and innovation, capital valuation and accounting, and herding behavior;
 Financial cycle prove to accelerate economic cycle (Claessens, et.al, 2011), accumulate risks and lead to systemic crisis
(Claessens and Kose, 2013; Reinhart & Rogoff, 2009);
 Four types of pro-cyclicality that often lead to crisis: housing bubles, credit booms, external debts, volatile capital flows
(Jorda, et.al., 2011, 2014; Calvo & Reinhart, 2000).
3. Spreading of systemic risks through financial interconnection and networks:
 Portfolio diversification beyond certain threshold increase systemic risk from interconnection (Allen, et. al., 2010; Acemoglu,
et.al., 2015). Lending standard also fluctuate (Rajan, 1994).
 Currency crisis due to sudden stop of foreign capital flows spread through interconnection in the forex market (Calvo &
Reinhart, 2000). Bank runs spread to bank contagion due to interconnection in the inter-bank money market (Freixas, et. al.,
2000; Morris & Shin, 2004).
4. Escalation and contagion of crisis through herding behaviour and assymmetric information:
 Herding behaviour due to ‘follow the leader’ and profit target based remuneration (Bikhchandani & Sharma, 2001).
Contagion due to herding behavior and misinformation (Acharya & Yorulmazer, 2003).
 Sub-prime mortgage crisis in the US became contagion and caused ‘fire sales’ and ‘credit squeeze’ in all financial system
(Diamond & Rajan, 2010), and then spreading to Europe and all the globe.
5. The Growing Importance of Macrofinancial linkages
THE NEW PARADIGM OF CENTRAL BANK POLICY 77

The global financial crises emphasize the importance to maintain financial system stability through integration of macroeconomic,
macroprudential and microprudential policies.

Macroeconomic Policy
Microprudential Policy Macroprudential Policy
(Fiscal/Monetary/External)

maintain macroeconomic stability maintain the soundness of individual

(inflation, current account deficit, and financial institution, banks and non- maintain financial system stability from
fiscal deficit) and support/boost bank. Necessary, but not sufficient to macro perspective (macro-financial
economic growth maintain financial system stability linkages) and mitigate systemic risk

Pre-GFC… Post-GFC…

Macro Prudential Macro Prudential

Macroeconomic Macroeconomic
Policies Macroeconomic Policies Macroeconomic Microprudential
(monetary/fiscal/ Policy (monetary/fiscal/ Policy Policy
external) external)

Price Stability Price Stability Financial

Idiosyncratic Idiosyncratic
Economic Economic Stability
Risk Risk
Activity Activity Systemic Risk

Source: IMF
THE NEED FOR INTEGRATED POLICY FRAMEWORK: MONETARY AND MACROPRUDENTIAL 88

• Central bank’s mandate of price stability needs to be enlarged with supporting financial system stability.
• FX intervention to stabilize exchange rate may be needed to strengthen the effectiveness of interest rate
policy for achieving price and external stability.
• Monetary policy need to be complemented with macroprudential policy to support financial stability.

INTEGRATED INFLATION TARGETING FRAMEWORK (IITF)

MACROECONOMIC MACROECONOMIC FITF FITF IITF

TARGET INDICATORS (PRE-CRISIS) (POST-CRISIS) (POST-CRISIS)

Inflation Gap (I) Taylor-rule with I, O & FX

Price Stability Output Gap (O)
Taylor-rule with I & O
factors
Central bank rule with I, O, C & FX factors

Monetary & macroprudential instruments

Micro-Macroprudential
Microprudential Instruments calibrated together (Mon+MaP) &
Financial Stability Credit Gap (C)
(MiP)
Instruments
Coordinated Micro-Macroprudential
(MiP and MaP)
instruments (MiP+MaP)

Floating Exchange Rate regime with FX

Exchange Rate (FX) Free-Floating Exchange Rate Floating Exchange Rate
External Stability Volatility regime regime with FX intervention
intervention and foreign capital flow
management

Source: Warjiyo & Juhro (2019, p.478), adapted from Agenor & da Silva (2013).
MACROPRUDENTIAL POLICY FRAMEWORK: OBJECTIVES & INSTRUMENTS 99

…includes regulation and supervision of financial institutions from macro-perspective, focusing on systemic risk both from time dimension
(procyclicality) and cross-section.

Macroprudential Policy objectives TIME DIMENSION… CROSS-SECTION DIMENSION…

Upswing
1. To manage procyclicality of financial system (“boom”) Bank A Bank D
due to macro financial linkages (time Pro-cyclicality
dimension), Systemic
2. To mitigate systemic risk due to Risk
interconnectedness and financial network
Downswing Desired Bank B Bank C
(cross-section dimension). economic cycle
(“Burst”)

Source: Warjiyo & Juhro (2019, p.436)

Other objectives
The Taxonomy of Macroprudential Instruments…
To support system-wide financial regulatory as an
incentive or disincentives for market players
(structural dimension) Risk Types Risk Dimension: Time Series of Cross-Sections

Time Series
Leverage/ Credit/ Asset
• Countercyclical Capital Buffers
Price Booms
• Time-Vaying LTV
Macroprudential Instruments Time Series
• Time-varying Systemic Liquidity Surcharges
Liquidity/ Market Risk
1. To manage procyclicality: i.e. LTV ratio and • Time-varyinh limits in currency mismatch or exposure (e.g. real estate)
counter-cyclical capital buffer. • Time Varying limits on loan-to-deposit ratio
Cross-Sections
2. To mitigate systemic risk: i.e. net open • Systemic Capital Surcharges
position, limitation on FX exposures and Interconnectedness/ Market
• Systemic Liquidity Surcharges
Structure/ Financial
external debt • Powers to break up financial firms on systemic risk concerns
Infrastructure
• Restrictions on permissible activites (e.g. ban on proprietary trading for systemically
important banks)
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Evolution of Monetary Policy

1
Framework

2 BI’s Policy Mix Framework

Challenges and BI’s Policy Mix

3
Experiences

ECONOMIC AND MONETARY POLICY DEPARTMENT

BANK INDONESIA POLICY MIX: THE MAIN FRAMEWORK* 11
11

Goal Monetary side FSS side

to achieve price stability (inflation target tenhance the effectiveness of monetary policy transmission through to manage pro-cyclicality & mitigate the build
& exchange rate stability) & to support various channels (the interest rate, exchange rate, liquidity, bank up of systemic risk, especially from credit,
financial system stability (FSS). credit, as well as in terms of risk-taking behavior & expectation). property, foreign debt, & capital flows.

Goal: Price Stability and support FSS

Price Stability Strategy: Bank Indonesia’s Policy Mix
(taking into account Financial System Stability
sustainable economic (Systemic Risk – Cross
Section & Time Series) Interest Rate • BI7DRR Rate
growth) Policy • Coridor & term structure
Mon. Operation
Exchange • Consistent with fundamental
Rate Policy • (Short-term) volatility

Monetary Macro- Capital • Consistent with

Policy prundetial Flows fundamental
Trilemma Trilemma Management • (Short-term) volatility
Macro- • Support effective monetary
Exchange Rate Stability Foreign Capital Balanced Efficiency & prudential transmission
(Market Mechanism & Flows (Reserve Intermediation Inclusion (Financial Policy • Mitigate procyclicality & mitigate
Consistent w/ Adequacy) (Optimal Credit) Market Deepening) build-up systemic risks
Dundamental) Coordination • With Government (inflation,
& Commu- fiscal, & structural reforms) and
nication KSSK for financial stability
• Communication to manage
expectations

* Before the Law on Financial Sector Development and Strengthening (P2SK)

CENTRAL BANK’S POLICY MIX: GENERAL GUIDELINE AND EXPERIENCE 12
12

Forecasted Price Stability Risk

Low High

Quadrant II Quadrant IV
High  Monetary NEUTRAL/ LEANING  Monetary TIGHT
Forecasted  Macroprudential TIGHT  Macroprudential TIGHT
Financial
Stability Risk Quadrant I Quadrant III
Low  Monetary NEUTRAL/ LOOSE  Monetary TIGHT
 Macroprudential NEUTRAL/LOOSE  Macroprudential NEUTRAL/LEANING

Four Cases of Policy Mix

• Quadrant I • Quadrant III

Inflation within the target range & low credit growth; hence
monetary policy may be relaxed and accommodative
macroprudential policy may be implemented (i.e. easing LTV). For
example Indonesia during mid 2015-2017 and during Covid-19
Pandemic 2020-2021.
High inflation but low credit growth; hence accommodative
macroprudential policy (easing LTV) & tight monetary policy
(increase/high interest rate). For example during end 2014 - mid
2015, 2018 & 2022-2023 (tight monetary policy to maintain
stability).

• Quadrant II
Low inflation but high credit growth, hence tight macroprudential
policy (increase LTV) & neutral/accommodative monetary may be
implemented. For example Indonesia during the period of 2010-
mid 2013.
• Quadrant IV
High inflation (above target range) & high credit growth; hence
tight monetary policy (increase policy rate & RRR) & tight
macroprudential policy (increase LTV). For example Indonesia
during the period of mid-2013 - end 2014.
POLICY MIX ENHANCEMENT: INTEGRATION OF MONETARY, MACROPRU AND PAYMENT SYSTEM 13
13

A well-functioning payment system, monetary system as well as

financial system will act as a basis for economic growth, prosperity
and financial system stability (Bank Indonesia, 2019)

To support sustainable economic growth

PRICE, EXCHANGE RATE, PAYMENT SYSTEM, AND FINANCIAL STABILITY

“Maintaining Rupiah
value stability both “Macroprudential policy
in terms of prices The Payment system plays a role in the transmission of for supporting the
and exchange rate effective monetary policy, supporting efficiency of stability of Financial
stability” intermediation and resilience of financial system System”

MONETARY PAYMENT SYSTEM FINANCIAL SYSTEM

 Transmission of effective A fast, affordable, easy, safe, and  Balanced, high quality, &
monetary policy reliable payment system sustainable Financial system
intermediation
 Low and Stable inflation
 Safe and reliable infrastructure  Managed systemic risk
 Rupiah exchange rate
stability in accordance with  Payment system digitalization  Economic and financial
its fundamental value for digital economy and financial inclusion as well as
 Affordable cost of transaction sustainable finance

 High-quality and reliable

Indonesian Rupiah Currency

Source: Juhro (2015), Juhro et al (2020), modified

POLICY MIX ENHANCEMENT: PIVOTAL LINKAGES 14
14

Monetary Policy • Interest rate

• Liquidity Monetary
• Interest rate • Exchange rate Stability
• FX Intervention • Capital flows
• Reserve Requirement

SUSTAINABLE ECONOMIC GROWTH

• Capital Flows Management
• International reserve • Credit growth
management • Funding & lending interest rate
• Exchange rate

MACRO STABILITY
• Bank liquidity
Macroprudential Policy
• CCyB
• Macroprudential Intermediation • Systemic risk
Ratio • Lending imbalances Financial
• Macroprudential Liquidity Buffer • Intermediary & financial access System Stability
• LTV/FTV • The efficiency of the financial system
• SBDK
• Macroprudential Inclusive Financing
Ratio • Liquidity risk
• Access to financial system
Payment System &
Currency Mgt Policy

• Payment System
Infrastructure (3I) • Settlement risk
• A smooth transaction
• Intraday liquidity facility Payment
• The efficiency of the payment system
• Less Cash Policy • Public confidence in the System Stability
• Pricing Policy • payment system
• The use of the Rupiah
Source: Juhro, 2020
INSTITUTIONAL SETTING: INDEPENDENCY VS POLICY COORDINATION 15
15

To achieve high, sustainable and inclusive growth with macroeconomic and financial stability, it is important to have close coordination
between central bank policy, fiscal policy, and structural reforms.

Central bank policy mix Structural reforms Fiscal policy

• Maintaining price stability and
supporting financial stability
• Policy mix of interest rate, exchange
rate, capital flow management and
macroprudential measures.
• Achieving higher growth through
productivity of capital, labor and
technological change
• Reforms in infrastructure, investment
climate, product and market, and labor.
• Macroeconomic stability through
sustainable fiscal deficit and public debt.
• Tax policy and allocation of productive
spending for stimulating higher &
inclusive growth

Medium-Long Term Perspective

Cyclical demand management + Structural reform

Actual Economic Condition

Short Term Perspective Structural Reform to minimize potential
Cyclical demand management volatility and increase economic capacity

Countercyclical Policies in
the demand side Economic Capacity

Source: Juhro (2015)

BUILDING NEW MODEL BIPOLMIX (NEW MANDATE) – POLICY PERSPECTIVE 16
16

TOTAL LIQUIDITY
MAKROPRUDENTIAL (TLMP)
MIR
MLB
MIFR
MLP
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Evolution of Monetary Policy

1
Framework

2 BI’s Policy Mix Framework

3 Challenges and BI’s Policy Mix

Experiences

ECONOMIC AND MONETARY POLICY DEPARTMENT

CHALLENGES OF MONETARY POLICY DURING VS POST COVID-19 PANDEMIC 18
18

In the midst of a rapidly changing strategic environment, the challenges faced by Central Banks are increasingly complex as they strive to
maintain macroeconomic and financial system stability
COVID-19 Pandemic

1. Challenges “Beyond Economics”: Covid-19 Pandemic has led to an unprecedented crisis. The pandemic were not only
affecting economic but also health and human being wellness. Global economic slumped and heightened financial market
uncertainties created capital outflows as well as currency pressures in the EMs. The challenges were how to mitigate the
impact on the economic growth as well as to save the people.
2. Big Unknown and Uncertainty: bigger uncertainty and complexity of issues, including when the pandemic will be over
and how to work on synergizing a national policy through coordination among authorities while respecting the
independency of each authority.
3. The emergence of Digitalization: Pandemic has changed rapidly the human behavior in adapting digital technology
development. Central banks have to respond this trend in their policy formulation and become more agile organizations

Post-COVID-19 Pandemic

1. Challenges “More Frequent Non-Economic Rooted Crises”: War in Ukraine hindered the economic recovery process in the
post-pandemic era by inducing slower global economic growth as well as high commodity prices and inflationary pressure.
2. Higher Uncertainty and Volatility: The divergence economic recovery between AEs and EMs, inflationary pressure di AEs, as
well as, tightening monetary policy stance has led to high uncertainty and volatility in the financial market which in turn lead to
capital outflows and exchange rate pressures in EMs
3. Accelerated Digitalization: The pandemic accelerated the digitization of financial transactions. Policymakers faced the
challenge of adapting to evolving technological trends and assessing their implications for monetary policy.
MACROECONOMIC CONTEXT 19
19
Pandemic Period Post Pandemic Period
2019 2020 2021 2022
GLOBAL
• GDP (%,yoy) 2.81 -2.95 6.02 3.16
• INFLATION (%, yoy) 3.85 2.08 5.74 8.50
• OIL PRICES (US$/bl) 64 42 71 101
• FFR 1.75 0.25 0.25 4.50
• DXY 97.41 95.82 92.51 103.97
DOMESTIC
• GDP (%, yoy) 5.02 -2.07 3.70 5.31
• INFLATION (%, yoy) 2.72 1.68 1.87 5.51
• EX. RATE 14,139 14,530 14,300 14,850
• CA (% GDP) -2.71 -0.42 0.29 1.00
• CREDIT (% yoy) 6.08 -2.41 5.24 11.35
• FISCAL DEFICIT (% GDP) -2.20 -6.14 -4.57 -2.35
BANK INDONESIA’S POLICY MIX: 2020 – 2021 (PANDEMIC) 20
20

• More accommodative stance of global monetary policy in the US and other countries. Global market uncertainty
continues with rise in COVID-19 and prospect of economic recovery post COVID-19.
• Domestic Inflation remained benign at 1.87% in December 2021, well maintained within the 3.0±1% target range.
Macroeconomic • Declining and contraction credit growth from 6.1% in 2019 to -2.41% in 2020, and rebound at 5.24 in December 2021.
Developments • Declining CA deficit from 0.4% of GDP in 2020 to 0.8% of GDP in 2nd quarter of 2021. Surplus in capital account to
support overall balance of payments.
• In 2020, after reserve decline to $120,4 for Rupiah stabilization, reserve is bouncing to $135.9 billion in August 2020.
The position of reserve assets at December 2021 stood at USD144.9 billion.

• The case of Quadrant I: With low Inflation, credit growth, as well as economic growth, and declining CA deficit,
Policy Issues accomodative monetary and macroprudential policies are needed to support the economic recovery from the
negative impact of rise in COVID-19.
Easing Monetary Policy:
1. Policy rate (BI7DRR) cuts 6 times by a total of 150 bps to 3.50% from February 2020
2. Bank Indonesia also conducted rupiah quantitative easing totaling about IDR726.57 trillion, mainly by lowering the
minimum statutory reserves by about IDR155 trillion and conducting monetary expansion in the amount of IDR555.77
trillion through December 30, 2020. In 2021, Bank Indonesia has injected liquidity through quantitative easing to the
banking industry totalling IDR 147.8 trillion.
3. Bank Indonesia also has implemented quantitative easing in accordance with Joint Agreements (SKB) I, II, and III
between the Minister of Finance and the Governor of Bank Indonesia. This involves the purchase of SBN (Sovereign
Bonds) on the primary market, amounting to approximately IDR1,105 trillion.
Policy Mix Further Accommodative Macroprudential Policy:
1. BI relaxed LTV ratio for green automotive loans/financing from 5-10% to 0%, effective 1st October 2020. Bank Indonesia
eased the rupiah statutory reserve requirement by 50 bps as an incentive for banks to engage in export and import
financing for productive purposes; MSMEs; and certain priority sectors defined in the PEN program, through June 30,
2021.
2. Bank Indonesia pursued actions in follow up to Act No. 2 of 2020 as part of the national policy response under the
pressing conditions caused by the pandemic.
BANK INDONESIA’S POLICY MIX: 2022-2023 (POST PANDEMIC)-POLICY RECALIBRATION 21
21

• Global economy experienced another downturn in 2022, triggered by global geopolitical tensions that
increased recession risk and led to high inflation. Uncertainty on global financial markets is increasing
which has an impact on capital outflows from developing countries, and increasing exchange rate
pressures on these countries.
• Domestic CPI inflation in 2022 was recorded at 5.51% (yoy), an increase compared to 2021 CPI
inflation of 1.87% (yoy) and higher than the target of 3.0 + 1%, mainly influenced by the impact of
adjustments in subsidized fuel prices in September 2022.
• Strong domestic economic growth was recorded in the fourth quarter of 2022 at 5.01% (yoy), bringing
growth for the year of 2022 to 5.31% (yoy), up significantly from 3.70% (yoy) in 2021.
Macroeconomic
• Bank credit growth in December 2022 was recored at 11.35% (yoy), higher than the previous year's
Developments growth of 5.24% (yoy).
• Current account surplus in 2022 increased significantly to USD13.2 billion (1.0% of GDP) compared with
a USD3.5 billion surplus (0.3% of GDP) in 2021. Meanwhile, the capital and financial account in 2022
recorded a deficit of 8.9 billion US dollars in line with high uncertainty in global financial markets. With
these developments, the overall balance of payments for 2022 posted a surplus of US$4.0 billion, after
recording a surplus of US$13.5 billion in the previous year.
• The position of foreign exchange reserves at the end of December 2022 remained strong, namely
US$137.2 billion, although it was lower than the foreign exchange reserves in December 2021 of
USD144.9 billion.

• The case of Quadrant III: Monetary policy is directed at maintaining stability (pro-stability), while 4
other policies (including macroprudential) are directed at supporting growth (pro-growth). This is
Policy Issues taking into account the high pressure on the external sector and inflation, amidst the ongoing economic
recovery and the financial cycle which is still in an accelerated phase.
BANK INDONESIA'S 2022 POLICY MIX...
Maintaining Stability and Momentum for National Economic Recovery…
1 MONETARY POLICY
i. Raising the BI 7-Day Reverse Repo Rate (BI7DRR) by
200bps to 5.50%, while also raising the Deposit Facility (DF)
and Lending Facility (LF) rates to 4.75% and 6.25%, as a front-
loaded, pre-emptive, and forward-looking measure to ensure
continued lower expected inflation and inflation, so core
inflation maintain within the range of 3.0±1%;
ii. Strengthening rupiah stabilisation policy as part of the
measures to control inflation, primarily imported inflation,
through foreign exchange market intervention, including spot
and DNDF transactions, as well as buying/selling SBN in the
secondary market;
iii. Continuing to buy/sell SBN in the secondary market to
strengthen transmission of the higher BI7DRR by increasing
the attractiveness of SBN yields for foreign portfolio investment
inflows to strengthen Rupiah exchange rate stabilization
measures;
iv. Issuing new foreign exchange monetary operation (MO)
instruments to boost placement of Export Proceeds,
especially from Natural Resource, domestically by banks and
exporters to strengthen stabilization;
v. Normalising the liquidity policy by raising rupiah reserve
requirements (RR) and maintaining the RR incentive, without
disrupting the intermediation function or participation in SBN
purchases to fund the State Revenue & Expenditure Budget;
vi. Continuing to purchase SBN in the primary market to fund
the national economic recovery and finance the health and
humanitarian aspects of the Covid-19 pandemic, totalling
Rp273.11 trillion in the year of 2022.
2 MACROPRUDENSIAL
POLICY RELAXATION
i. Implementing policy incentives for banks
disbursing loans/financing to priority sectors
and MSMEs and/or fulfilling the Macroprudential
Inclusive Financing Ratio (RPIM) and expanding
the scope of priority subsectors from 38 to 46;
ii. Maintaining accommodative macroprudential
policy to revive bank lending to businesses by:
a) holding: (a) the countercyclical capital buffer
(CCyB) at 0%, (b) Macroprudential
Intermediation Ratio (MIR) in the 84-94%
range, and (c) Macroprudential Liquidity Buffer
(MPLB) at 6% with repo flexibility of 6% and
sharia MPLB at 4.5% with repo flexibility of
4.5%,
b) Maintaining looser Loan/Financing-to-Value
(LTV/FTV) on property loans/financing, and
c) Maintaining looser down payment (DP)
requirements on automotive loans/financing at
0%
iii. Continuing prime lending rate (PLR)
transparency policy with a focus on bank's
interest rate responses to the policy rate.
4 DEVELOPING MSMEs, SHARIA ECONOMY AND FINANCE, FINANCIAL MARKET
DEVELOPMENT, COORDINATING WITH THE GOVERNMENT AND OTHER INSTITUTIONS
22
22
3 PAYMENT SYSTEM DIGITALIZATION
i. Accelerating QRIS acceptance, including the cross-
border QRIS and increasing the QRIS transaction
limit; the electronification of the distribution of
Government social assistance programs, various
modes of transportation, as well as regional
government financial transactions;
ii. Issuing the Government Domestic Credit Card
(KKP) and accelerating National Open API
Payment Standard (SNAP) adoption for banks and
nonbank institutions;
iii. Accelerating BI-FAST implementation through
increased participation, service expansion, and
acceptance of BI-FAST;
iv. Extending the validity of min. payment & of
penalty for late credit card payment to 30 Jun’23;
v. Continuing validity of National Clearing System
(SKNBI) tariff of Rp1 from BI to banks and max. of
Rp2,900 from banks to customers to 31 Jun’23;
vi. Extending the validity of QRIS Merchant Discount
Rate (MDR) for merchants in the Micro Business
category at 0% to 30 Jun’23.
BANK INDONESIA POLICY MIX DIRECTION IN 2023: 23
23
MAINTAINING STABILITY, ACCELERATING ECONOMIC RECOVERY
Bank Indonesia policy mix in 2023 will still be directed towards strengthening economic resilience, recovery and revival in close synergy with
national economic policy.
Bank Indonesia Policy Mix Direction 2023

Focus on stabilizing the Focus on Accelerating the Encouraging Strengthening

Rupiah exchange rate macroprudential digitization of integration in order development
and controlling inflation easing to increase payments for the to support a modern programs to support
to return to the target bank credit/financing integration of the and efficient the achievement of
earlier as part of to support national national digital financial market, as a sustainable
mitigation measures economic recovery economy & finance well as being able to economy with a
against the propagating while maintaining ecosystem, developing support financing for stable, inclusive and
impact of global turmoil. payment system Digital Rupiah, and the national green financial
stability. expanding cooperation economy. system
in payment systems
between countries.
Source: Bank Indonesia
MONETARY POLICY IN 2023 24
24

Bank Indonesia monetary policy in 2023 will focus on stabilizing the Rupiah and managing inflation towards the target corridor sooner, as part
of the mitigation measures against the impact of global spillovers.

Bank Indonesia Monetary Policy Direction in 2023

MITIGATING THE IMPACT OF GLOBAL SHOCK SPILLOVER

STAGNATION – RECESSION GLOBAL POLICY RATE STRONG US DOLLAR AND WEAKENING HIGH RISK PERCEPTION AND
– HIGH INFLATION “HIGHER FOR LONGER” CURRENCY ACROSS THE WORLD “CASH IS THE KING”

Monetary Policy “Pro Stability”

Front Loaded, Pre Emptive, Forward Looking

1 2
MONETARY POLICY TRILEMMA

Target Core Inflation within target 3±1% on the first half of 2023 and COORDINATION WITH
Policy Rate rupiah exchange rate stabilization policy GOVERNMENT
for Inflation
Policy Rate On a front loaded, pre-emptive and forward looking basis to lower
BI7DDR inflation expectation and core inflation earlier, in the dirst half of 2023 1. Inflation control with TPIP/TPID
and GNPIP
Exchange Rate Stabilization of rupiah exchange rate to control inflation, particularly imported inflation, 2. Fiscal-Monetary Coordination
Stabilization through spot intervention, DNDF, and SBN transaction in secondary market
3. Development of priority sector
Twist SBN Sale/purchase in secondary market to maintain the attractiveness of SBN yield to draw
Operation foreign portfolio investment in order to strengthen the stabilization of Rupiah exchange rate

Liquidity The accommodative liquidity policy stance maintained to support the availability of funds in the banking
Management industry to disburse loans/financing to businesses and in the economy to support economic activity
Rupiah Foreign exchange
Stabilization Reserve Adequacy

STRENGTHEN THE STRATEGY OPTIMIZATION OF FOREIGN RUPIAH AND FOREIGN

OF INTEGRATED MONETARY EXCHANGE RESERVE CURRENCY MONEY MARKET SINERGY AND COORDINATION
POLICY MANAGEMENT MANAGEMENT DEVELOPMENT
MACROPRUDENTIAL POLICY IN 2023 25
25
Bank Indonesia holds its accommodative macroprudential policy in 2023 to increase banking lendeing for supporting the national economic
recovery while maintaining financial system stability.
Bank Indonesia Macroprudential Policy Direction in 2023
PAYMENT SYSTEM POLICY IN 2023 26
26

Bank Indonesia continues to direct its payment system policy towards accelerating payment system digitalization for further integration in the
national economic-financial digital ecosystem, developing Digital Rupiah, as well as expanding cross-border payment system cooperation.
Bank Indonesia Payment System Policy Direction in 2023
 THE POLICY MIX BRINGS INDONESIA’S ECONOMY STAYS STRONG... 27
27
Indonesia's economic growth in Q1-2023 recorded at 5.03%. Projected to remain The Balance of Payments (BOP) remains sound, thereby supporting external
strong with potential gains driven by improving domestic demand and solid export resilience. Portfolio investment recording a net inflow totaling USD0.13 bio (20Jun)

Economic Growth (GDP) by Expenditure (%, yoy) Foreign Capital Inflows

2021 2022 2023
Components 2020 2021 2022
I II III IV I II III IV I
Household Consumption -2.63 -2.21 5.96 1.02 3.56 2.02 4.34 5.51 5.39 4.48 4.93 4.54
Non-Profit Institution Serving
-4.21 -3.65 4.06 2.87 3.20 1.62 5.90 5.02 5.97 5.70 5.64 6.17
Household (NPISH)
Government Consumption 2.12 2.57 8.22 0.65 5.29 4.24 -6.62 -4.63 -2.55 -4.77 -4.51 3.99
Investment (GFCF) -4.96 -0.21 7.52 3.76 4.49 3.80 4.08 3.09 4.98 3.33 3.87 2.11
Building Investment -3.78 -0.74 4.36 3.36 2.48 2.32 2.58 0.92 0.07 0.11 0.91 0.08
NonBuilding Investment -8.44 1.44 18.50 4.96 10.40 8.42 8.63 9.71 19.32 12.11 12.53 7.93
Exports -8.42 2.17 28.41 20.74 22.24 17.95 14.22 16.40 19.41 14.93 16.28 11.68
Imports -17.60 5.21 33.20 31.08 32.61 24.87 16.04 12.72 25.37 6.25 14.75 2.77
GDP -2.07 -0.69 7.08 3.53 5.03 3.70 5.02 5.46 5.73 5.01 5.31 5.03
Source: BPS

Inflation continues retreating towards the target quicker than The rupiah under control in line with BI The bank intermediation function maintained strong growth
previously projected. Core inflation remain under controlled stabilisation measures until mid-2023

CPI Inflation Rupiah vs Peers Credit and Deposit Growth

 28

Wahyu Agung Nugroho, PhD

Director

Central Bank Policy Mix Seminar

Bali, July 4th 2023

ECONOMIC AND MONETARY POLICY DEPARTMENT

THE ENHANCEMENT OF BI CORE MODELS (SUMMARY)
ARIMBI MODEL
MODELING ASPECT
– Last version (2019)
Policy Paradigm ITF / Flexible ITF
Theoretical Background New Keynesian Small Open Economy
Model Type and Estimation DSGE (semi structural)
Method Calibration and Bayesian
Block External, Macro, Financial, Fiscal
(Small scale model)
Linkage Behavior Macro – External Linkages
Modeling System Forecast & Policy Analysis System
(FPAS)
Policy Instruments & Features • Policy Rate, GWM (RR), FX
Intervention, MPM (LTV)
Economic/Financial Cycle prioritizing the economic cycle
Assessment
BIPOLMIX MODEL
V. 2022
CB Policy Mix
New Keynesian Small Open Economy
DSGE (semi structural)
Calibration and Bayesian
External, Macro, Financial, Fiscal,
with endogenous tech progress
(Medium scale model)
Macro – Financial – External – Fiscal
Linkages
FPAS by strengthening the linkage of
the Core and Satellite models
• Policy Rate, GWM (RR), FX
Intervention, Rintermed.
• Balance sheet channel, export
import model
• Interaction of fiscal instruments
• Digital economic/finance
• Countercyclical liquidity
management
The economic and financial cycles
are integrated
29
29
BIPOLMIX MODEL
V. 2023
CB Policy Mix selaras UUP2SK
New Keynesian Small Open Economy
DSGE (semi structural)
Calibration and Bayesian
Eksternal, Macro, Financial,
with endogenous tech progress
(Medium scale model)
Macro – Financial – External Linkages
FPAS by strengthening the linkage of the
Core and Satellite models
• Policy Rate, monetary GWM and
Makroprudensial Total Liquidity (TLMP)
, LTV, CCyB, FX Intervention (FXP).
• Balance sheet channel
• Ex. Rate fundamental (BEER)
• Inflation disaggregation (inti, VF, AP)
• Liquidity instruments (QE/QT)
• Digital economic/finance
The economic and financial cycles are
integrated
POLICY MIX ENHANCEMENT: ON IMPOSSIBLE TRILEMMA 30
30

Monetary and Macro-prudential

Policy (instrument) mix

Maintaining monetary policy autonomy to

achieve price stability and financial stability
• Interest rate to address inflation expectation
• Macro-prudential measures to manage liquidity
and financial stability

Monetary Policy Sovereignty

Exchange Rate Stability Capital Account Openness

Exchange Rate Management Capital Flow Management

Stabilizing exchange rate movement in line with
its fundamental
• Foreign exchange intervention to smooth out ER
volatility
• Manage foreign exchange reserve adequacy:
acummulate FX reserves during inflows and use
the reserve during outflows (self insurance)
Managing capital flow to support macro stability
• Macroprudential to manage capital flow,
especially short term and prevent external sector
risks (i.e. sudden stop capital reversal) .
• Promote financial deepening (FX market, bonds
market, money market)
• Support foreign exchange reserves management
as a form of self-insurance.

Source: Juhro & Goeltom (2012; 2015)

CENTRAL BANK POLICY MIX RATIONALE 31
31

Analytical model to EM economic structure and policy mix framework …

𝒚 = 𝜶𝑫 −𝝓𝒊 + 𝝎𝒎 + 𝝍𝒆 + 𝜶𝑬 −𝒊∗ − 𝝉𝒆 (1)

𝒚 as output, 𝝅 as inflation, and 𝒆 as exchange
∗
𝝅 = 𝜿𝒚 + 𝜼 𝝅 − 𝝆𝑰 𝒆 (2) rate (↑ appreciation). Variables are in percentage
deviations from steady state
𝒆 = 𝝀𝒊 (𝒊 − 𝒊∗ ) + 𝝀𝒇 𝒇 − 𝜸𝒙 (3)
(𝒎) as macroprudential policy

(𝜸𝒙) as exchange rate intervention

(𝒇) as global financial condition shock

Trade channel and financial

Policy mix consists of interest Model parameters represent
channel operate in the Greater external impact to
rate, macroprudential and EM’s economic structure
economy with significant exchange rate than return
exchange rate intervention
financial channel impact