Moral Encouragement Policy and Monetary Wisdom Tool
The central bank is able to influence the amount of money in circulation with various forms such as speeches, announcements, and circulars aimed at commercial banks and other monetary actors. The contents of the announcement include a call or an invitation to hold a savings loan
Monetary Wisdom Tool
Monetary policy can be carried out by implementing monetary policy instruments, which include:
Open market operations of rupiah or foreign exchange money
Open market operations are a way of controlling money in circulation by selling or buying government securities. If you want to increase the money supply, the government will buy government securities. However, if you want the amount of money circulating to decrease, the government will sell government securities to the public. Government securities include but are not limited to SBIs or abbreviations from Bank Indonesia Certificates and Money Market Securities (SBPU).
Determination of minimum required reserves
The politics of cash reserves means policies to increase or decrease the cash reserves that must exist in commercial banks. If economic conditions increase in price (inflation), the central bank can increase its minimum cash reserves so that the money in circulation can be reduced. Conversely, if economic conditions are sluggish, the government can reduce its minimum cash reserves, so that the money in circulation increases because of the large number of loans given to the public. As a result of the increase in cash reserves, the ability of commercial banks to provide loans is reduced or commercial banks are unable to provide loans and at the same time idle funds in banks increase.
Determination of the discount rate
Determination of the discount rate is setting the amount of money in circulation by playing the interest rate of the central bank at commercial banks. Commercial banks sometimes have a shortage of money so they have to borrow from the central bank. To make the amount of money increase, the government reduces the interest rate of the central bank, and vice versa raises the interest rate in order to make the money in circulation decrease.
Credit or financing arrangements
Credit or financing arrangements are policies to tighten or facilitate the provision of loans to the public. To regulate economic activities to grow better, the government (Bank Indonesia) can selectively supervise loans with the aim of ensuring that commercial banks provide loans and make investments as desired by the government. For example, to encourage the industrial sector, the central bank can make regulations that require commercial banks to lend part of their funds to industrial sector businesses with light conditions.
Other policies deemed necessary
Besides the policy tools above, there are still more policy tools that can and have been implemented by Indonesia:
Moral persuasion
Moral appeal is a monetary policy to regulate the money supply by appealing to economic actors. Examples such as calling on the lenders to be careful in issuing credit to reduce the money supply and to urge banks to borrow more money from the central bank to increase the money supply to the economy.
Sanering
Sanering is a policy to cut banknotes in circulation into two parts, one part or half of the nominal value being replaced with new banknotes and the other half being replaced with state bonds. This policy occurred during the reign of Sukarno.