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View all search resultsExpanded mandate may leave BI with ‘conflicting targets’
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A picture taken on July 17, 2024, shows Bank Indonesia's name displayed on a wall of the central bank's Jakarta headquarters. (JP/Deni Ghifari)
T
he House of Representatives is seeking to expand Bank Indonesia’s (BI) mandate to include economic growth and job creation, which analysts warn could conflict with monetary policy goals and motivate political interference.
Currently, the central bank’s mandate consists of safeguarding the rupiah’s exchange value and controlling inflation “within the framework of supporting sustainable economic growth”, according to Article 7 of the Financial Sector Development and Strengthening (P2SK) Law passed in 2023.
A planned revision of the P2SK Law currently under deliberation at the House includes an extra paragraph in Article 7 stating that BI is to “create an economic environment conducive for real economy growth and job creation”.
The central bank manages inflation primarily by controlling liquidity through its interest rates, making borrowing more costly when inflation rises and cheaper when consumer price growth eases.
The practical logic behind the job creation goal will require BI to loosen up when employment is weak, since a more relaxed monetary policy will generally push economic activity, which should create more jobs.
However, such a dual mandate could lead to a central bank policy dilemma in certain situations, such as when inflation rises while the job market is weak, which would leave BI with “conflicting targets”, according to Andalas University economist Syafruddin Karimi.
Monetary policy tightening to rein in high inflation may then be delayed to maintain labor demand, which “may erode credibility, create an expectation that inflation will diverge from the target and eventually force a sharper tightening with a higher output cost”, Syafruddin told The Jakarta Post on Monday.
