Proper Expectation
There is no fixed rule as to how market expectations are “proper” or not, in terms of what measures a central bank should or should not take. Markets must also be aware of whether a central bank is accorded a proper role as a monetary authority supported by others, like the overall supervision of all banks and other financial institutions, including the capital market. For certain, the independence of a central bank should be guaranteed, in terms of allowing it to choose which monetary instruments to rely on – perhaps even including the determination of a target regarding the rate of inflation. Alternately, an inflation target might be determined jointly with another government organ (the MoF); in such a case, it must have the authority to select which monetary instrument to employ (an instrument independent of and jointly aimed at an inflation target). If all these conditions are satisfied, then the market may entertain its expectation of what a central bank should do, including providing guarantees for liquidity when a variety of the “Greenspan Put” is required.
Read: AFTER THE FED AND ECB: IT’S YOUR TURN, BOJ
The next absolute requirement would be well-functioning overall supervision, supported by a cooperative government partner (MoF), one that sets a reasonable tax ratio (percentage of tax revenues to GDP… for Indonesia that would imply starting with 16 per cent and higher in the longer term, ultimately moving to a level 30 per cent, one that developed countries customarily reach). I do not know if this is a “realistic dream”, but it is certainly not an empty one. Bank Indonesia has done its job, by demonstrating that it is willing to implement modern monetary policy like quantitative easing, to add to its arsenal of monetary instruments that in the past only relied on setting interest rates. Of course, this must complement an accumulation of reserves, coordinated in cooperation with regional central banks, in a manner that strengthens monetary and financial resilience.