New BI Policy Rate to Develop Market: Analysts

The central bank’s plan to shift to a interest rate benchmark is expected to help spur transactions in the domestic money market and make the sourcing of funds more affordable, analysts say.

Bank Indonesia (BI) is planning to replace its existing key rate, also known as the “BI rate”, that is not directly tied to the market, with a seven-day reverse repurchase (repo) rate as the new reference for influencing borrowing costs.

The new benchmark rate, planned to take effect in August, plays a more direct role in the day-to-day central bank monetary operations to manage liquidity in the financial sector, because it is set during auctions held by BI to sell government bonds (SBN) under a condition that banks will pay them back within a set period.

The new benchmark would allow BI to play a more direct role in influencing the interbank market, OCBC Bank economist Wellian Wiranto said in a research note on Thursday. This was expected to encourage more money to circulate freely between banks, which, in turn, would enable banks to get funds to finance consumers’ and businesses’ borrowing needs.

“In short, credit growth should improve and so should economic growth in the longer run,” Wellian said in the note.

Indonesia’s money market remains under-developed, or in financial terms “illiquid”, when compared with its peers in ASEAN. Transactions in the market range between US$4 billion and $5 billion a day, less than half of Thailand’s $11 billion and Malaysia’s $13 billion, according to data provided in the note.

The low turnover was not caused by a lack of money, as the domestic banking system actually had excess liquidity, Wellian said, which was estimated at more than Rp 4 trillion (US$304 million).

BI is expected to announced the new rate policy on Friday. The seven-day repo rate is currently at 5.5 percent, which will be the nation’s new policy rate starting in August, which compares to the existing benchmark, the BI rate, of 6.75 percent.

Other analysts agree that BI’s new policy rate would develop the markets and address structural issues of excess liquidity in the banking system.

“A move to the seven-day reverse repo rate as a benchmark could also encourage the market to deepen the domestic interbank market, which should then encourage a better allocation of liquidity within the banking system,” Macquarie Bank Ltd. fixed income and currencies strategy head Nizam Idris said.

He added that the current BI benchmark rate, which is not directly tied to the market, had encouraged bigger local banks to hoard liquidity at the expense of smaller banks competing hard to seek funds.

Banks, however, disagreed. “I don’t think so. Big banks have bigger liquidity because they have big needs as well,” Bank Rakyat Indonesia (BRI) finance director Haru Koesmahargyo said.

Source: www.thejakartapost.com, 15/04/2016

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