The Impact of Money Supply (M2) and Inflation on BI Rate Indonesia

Abstract

This study explores the impact of money supply (M2) and inflation on the reference interest rate set by Bank Indonesia within the context of the country’s monetary policy framework. A quantitative approach was utilized, employing multiple linear regression analysis on time series data spanning from January 2015 to December 2024. The study assesses both the individual and joint effects of these key macroeconomic variables. Data were obtained from official reports published by Bank Indonesia along with the Central Statistics Agency (BPS), then analyzed using the EViews 12 software. The empirical results reveal that inflation exerts a positive and a notable statistical influence on the BI Rate, with a regression coefficient of 0.452 and a probability value of 0.0000 (<0.05). In contrast, the money supply (M2) displays a negative yet statistically insignificant relationship with the BI Rate, indicated by a coefficient of -0.304 and a probability of 0.4777 (>0.05). The simultaneous testing results further demonstrate that both variables jointly exert a significant influence on the BI Rate, as shown by the F-test with a probability value of 0.0000. Furthermore, the coefficient of determination (R²) of 0.337 implies that M2 and inflation collectively account for approximately 33.7% of the variation in the BI Rate, while the remaining 66.3% is attributed to other determinants not captured in this model.