Increasing Monetary Policy: Fueling Growth with Reduced Interest Rates - Aims, Methods, Outcomes
The Bank of Indonesia (BI) has implemented an expansionary monetary policy in 2020, aiming to stimulate economic growth and combat a potential recession. This policy works by influencing aggregate demand, which encompasses household consumption, business investment, government spending, and imports.
Under this expansionary policy, the BI reduced the BI 7-Day Repo Rate, increasing the money supply and lowering lending rates. This move was expected to stimulate household spending, particularly on durable goods like property and cars, and encourage businesses to invest more, leading to increased production.
The increased money supply also led to a weakened price of the domestic currency against foreign currencies, a phenomenon known as depreciation. This depreciation should, in theory, encourage exports, as the prices of domestic goods are lower in foreign markets, but the price of imported goods becomes more expensive.
Lower interest rates, a result of the expansionary policy, also stimulate households to apply for new loans and increase household consumption. Some businesses initially increased overtime hours and invested in light equipment to increase efficiency. The increased production activity created more jobs, leading to a fall in the unemployment rate.
The expansionary policy also encourages an increase in aggregate demand, stimulating businesses to increase production and recruit more workers. As the economy grows, businesses may become more confident, leading to further investments in new machinery, which would stimulate growth in aggregate output and real GDP, fostering economic growth.
The central bank implements expansionary policies with three options: cutting policy rates, lowering the reserve requirement ratio, and open market operations through the purchase of government securities. Lowering the reserve requirement ratio allows commercial banks to have more money to lend, further fueling economic growth.
However, it's important to note that extra money injection into the economy raises the inflation rate, which can be both favorable and unfavorable for the economy. While higher inflation can indicate a healthy economy, excessive inflation can erode purchasing power and lead to economic instability.
In conclusion, the expansionary monetary policy implemented by the Bank of Indonesia in 2020 has shown promising results in stimulating economic growth and creating more job opportunities. However, it's crucial to monitor the inflation rate to ensure that it remains within a manageable range.
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