Capacity to Forecast Inflation
In theory, monetary policy can be transmitted through various channels, namely the interest rate channel, the bank credit channel, the company balance sheet channel, the exchange rate channel, the asset price channel, and the expectation channel. By going through these channels, monetary policy will be transmitted and affect the financial sector and the real sector after some time (lag of monument policy).
In addition to monetary policies that are "direct" as above, the central bank can also influence its ultimate goal "indirectly", namely through various regulations and appeals (moral suassion) to the banking sector to accelerate the transmission mechanism of monetary policy. In exercising monetary control, Bank Indonesia is given authority to use monetary instruments in the form of but not limited to open market operations, setting discount rates, setting minimum reserve requirements, and arranging credit or financing.
There are several conditions that must be met so that monetary policy can achieve success in its implementation. The prerequisites include:
Central Bank Indepensi.
Actually there is no Central Bank that can be truly independent without interference from the government. However, there are policy instruments that are not influenced by the government, for example through fiscal policy.
Focus on goals.
Controlling inflation is only one of several other targets that the Central Bank intends to achieve. Other targets sometimes conflict with inflation control goals, such as economic growth targets, employment opportunities, balance of payments, and exchange rates. Therefore, the Central Bank should not set other targets and focus on the main target of inflation control.
Capacity to forecast inflation.
The Central Bank absolutely must have the ability to predict inflation accurately, so that it can set the inflation target to be achieved.
Instrument monitoring
The Central Bank must have the ability to oversee monetary policy instruments.
Implement consistently and transparently.
With the consistent and transparent implementation of the inflation target, the public's trust in the policies stipulated will increase.
Monetary Policy Instruments
The instruments that can be utilized by the government in efforts to make monetary policy include:
Open Market Operations Policy
Open market operations are one of the policies decided by the central bank to increase or decrease the amount of money in circulation. This policy was adopted by selling SBIs (Bank Indonesia Certificates) or buying securities in the capital market.
Discount Policy
Discount policy is a reduction or increase in the amount of money circulating in the community by changing commercial bank discounts. If the central bank has calculated the amount of money in circulation exceeds the need (a symptom of inflation), then the central bank; will take policies to raise interest rates. With this policy, it will automatically stimulate the arrival of people to save money.
Cash Reserve Policy
The central bank can draw up regulations to regulate (increase and decrease) existing cash reserves (cash ratio). Commercial banks accept money from customers (savings, current accounts, certificates of deposit, etc.) which of course there is a certain percentage of the currency deposited by the customer.
Strict Credit Policy
Credit is still given by commercial banks, but the grant must be based on conditions covering 5C, namely Character, Capability, Collateral, Capital, and Condition of Economy. With tetat credit economic policy, an efficient amount of money can easily be monitored. This kind of policy can also be taken when the economy is experiencing symptoms of inflation.