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Making monetary policy great again

July 5th, 2020
​⏰ 1 minute read

A (rough) representation of how the 4 money policy tools have shifted

Don’t worry
There’s been a lot of concern recently about Bank Indonesia action to boost money supply. The rupiah fell last week on the concerns. But there’s nothing to be worried about at all. In fact what’s happening now is a return to boosting our own economy which will lead to a stronger rupiah, lower interest rates & a booming stock market.

Pre 1997
Before 1997 money policy was kind of positive. The central bank reduced banks required reserves so that they could lend more. They also added money by lending to banks through what were called SBPUs. That was good, but they were also printing money to buy $ FX reserves which exports money supply &; always boomerangs. The biggest problem was high interest rates, 15-20%.

Post 1997
After 1997 money policy reversed. Reserve & capital adequacy requirements were all added to discourage lending. Instead of adding money, the central bank switched;to taking money out of the domestic economy through SBIs. The money printing to buy FX reserves accelerated which gives money to the external not domestic economy & later boomerangs. But interest rates did start to decline.

Now
The result, after a post crash recovery, has been economic slow down. To offset this the money policy has shifted again. Reserve requirements have come back down to boost lending. SBIs are vanishing taking less money out &; the central bank is now aggressively moving to buy debt to push money into our domestic economy. Printing for FX has slowed....

0%
This is now the best scenario. While BI still seems a be tempted to buy FX reserves;which is a bad, almost 100% of;the focus has become getting money into the domestic economy. This will promote economic growth which will strengthen the rupiah which will allow interest rates to fall. Needles to say, the stock market will absolutely love it.
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