The Role of Banks in Inflation Control
The purpose of the sentence is that Independent is defined as a state institution that is free from interference from the government and or other parties. Furthermore, Article 9 states that other parties are prohibited from carrying out any form of interference in the implementation of BI's tasks, and likewise BI must refuse or ignore all forms of interference from any party in the course of carrying out its duties. This independence is marked by giving full authority to setting targets to be achieved (goal independence) and freedom in using various monetary instruments (instrument independence on Journal Research) in achieving these targets.
Furthermore, Article 10 affirms that BI has the authority to implement monetary policy through setting monetary targets with regard to the inflation rate target. Likewise, to further enhance the effectiveness of monetary control and its capacity as a lender of the last resort, Article 11 states that lending by BI to banks is restricted.
The maximum loan period to the bank is 90 days and its use is only to overcome short-term funding difficulties. In addition, the credit must be guaranteed with high-value and easily liquidable securities with a minimum value of the amount of credit or financing received by the bank.
The current objectives and tasks of in accordance with the new law are the objectives to achieve and maintain the stability of the dollar.
To achieve these objectives BI has 3 main tasks, namely establishing and implementing monetary policies, regulating and maintaining a smooth payment system, and regulating and supervising banks. In the context of establishing and implementing the monetary policy, has the authority to set monetary targets by taking into account the inflation target set. It should be noted that the main tasks of BI have changed since the enactment of the law, namely from multiple objectives (promoting economic growth, creating jobs, and maintaining the stability of the dollar value) to a single objective (achieving and maintaining stability of the dollar value). Thus the success rate of BI will be more easily measured and accountable to the public.
What is meant by the stability of the value of the dollar is the stability of the value of the dollar reflected by the inflation rate and the exchange rate that occurs. The inflation rate is reflected in the general rise in prices of goods. Factors that influence inflation can be divided into 2 types, namely inflationary pressures originating from the demand side and from the supply side. In this case, only has the ability to influence inflationary pressure originating from the demand side, while inflationary pressure from the supply side (natural disasters, dry season, non-current distribution, etc.) is entirely beyond BI's control. Therefore, to be able to achieve and maintain low and stable inflation, cooperation and commitment from all economic actors, both government and private, is needed. Without this support and commitment, undoubtedly a very high level of inflation will be difficult to control. Furthermore, the dollar exchange rate is fully determined by the strength of demand and supply occurring in the market.
What can be done by is to maintain the value of the dollar does not fluctuate sharply. controls the inflation rate in the manner As stated above that control over inflation is very limited, because inflation is influenced by many factors. Therefore, always conducts an assessment of economic developments, especially against the possibility of inflationary pressures. Furthermore, the monetary policy response is based on the results of the assessment. It also needs to be said that inflation control cannot be done only through monetary policy, but also other macroeconomic policies such as fiscal policies and policies in the real sector.
For this reason, coordination and cooperation between cross-sectoral institutions is very important in handling this inflation problem.
The future monetary policy which is more focused on the single target of inflation is carried out by means of the end goal of the BI monetary policy in the future is basically directed towards maintaining inflation. The choice of inflation as the final target is also in line with the trend of the latest development of central banks in the world, where many central banks are turning to focus more on efforts to control inflation. The reasons underlying these changes are, first, empirical evidence shows that in the long run monetary policy can only affect the inflation rate, monetary policy cannot affect real variables, such as output growth or unemployment rates. Second, achieving low inflation is a prerequisite for the achievement of other macroeconomic targets, such as growth at full employment and providing employment to the fullest.
Third, most important, the determination of low inflation as the ultimate goal of monetary policy will be a nominal anchor for various economic activities.
The strategies used by in achieving the low inflation target are:
1. Review the effectiveness of monetary instruments and monetary policy transmission lines.
2. Determine the final target of monetary policy.
3. Identify variables that cause inflationary pressures.
4. Formulating the monetary policy response.
It can be added that the inflation rate obtained from the consumer price index (CPI) as the final target and the core inflation rate (core or underlying inflation) as the operational target.
The concept of core inflation (core inflation) can be divided into two, namely Based on the understanding, there are 2 concepts in terms of core inflation. First, core inflation is a component of inflation that tends to be 'persistent' or persistent in every movement of the inflation rate. Second, core inflation as a tendency to change prices in general (generalized component). Core inflation in some literature is also called the underlying inflation. This core inflation can be influenced or controlled by BI. In its operations, BI does not use CPI inflation as a reference in making monetary policy, but instead uses core inflation.