Two-way strategy to face the surge in oil prices

By combining monetary policy flexibility, precise fiscal policy, and strong coordination between authorities, Indonesia has the opportunity not only to survive but also to strengthen its economic foundations amid global uncertainties.

Jakarta (ANTARA) - Global economic uncertainty is intensifying alongside rising geopolitical tensions and a surge in world energy prices.

In such a landscape, the direction of monetary policy is becoming increasingly difficult to predict. The Federal Reserve’s shift towards a “two-way” policy approach marks the end of the era of certainty that interest rates would only move downwards.

For Indonesia, this dynamic is not merely an external phenomenon but a real challenge that demands a more adaptive, measured, and coordinated policy response.

The “two-way” approach is essentially an acknowledgement of the reality that economic risks are now symmetrical. Inflation could rise again, but growth could also weaken suddenly. In the global context, the rise in oil prices is one of the main sources of this uncertainty. Conflicts in energy-producing regions, supply chain disruptions, and production policies by OPEC+ countries have driven oil prices back into an upward trend.

For a country like Indonesia, which still has significant dependence on energy imports, this increase carries broad implications for inflation, the trade balance, and fiscal stability.

In such a situation, Bank Indonesia (BI) faces a classic yet increasingly complex dilemma. On one hand, BI must keep inflation within the target range, usually around 2.5% (plus or minus 1%). On the other hand, BI must also ensure that economic growth remains stable, especially amid external pressures that could weaken domestic demand.

The global rise in oil prices will directly increase inflationary pressures through several channels.

First, higher fuel prices will increase transportation and goods distribution costs.

Second, production costs in the industrial sector will also rise, which will ultimately be passed on to consumers in the form of higher prices.

Third, if the government decides to adjust subsidised fuel prices, the inflationary impact will be more direct and significant.

However, the nature of inflation due to rising oil prices tends to be cost-push rather than demand-pull. This means inflation is not caused by excess demand but by rising production costs. In such conditions, an overly aggressive monetary policy response—for example, sharply raising interest rates—risks slowing economic growth without effectively reducing inflation. This is where the “two-way” approach becomes crucial: BI needs to maintain flexibility to respond to inflation without excessively sacrificing growth.