JAKARTA (TheInsiderStories) - Bank Indonesia announced late Friday (April 15) of its plan to replace BI Rate as reference rate with a 7-Day Reverse Repo Rate as a move to improve effectiveness of the transmission of monetary policies in the financial market.
The policy will begin from August 19 this year, therefore there is enough time for the central bank to disseminate this policy to the financial industry players.
“Bank Indonesia reformulates its policy rate from BI Rate to BI 7-Day (Reverse) Repo Rate. This is done in order to improve the effectiveness of the transmission of monetary policies,” BI Governor Agus Martowardoyo said, who spoke via teleconference during the press conference.
BI Deputy Governor Mirza Adityaswara said the policy does not imply that the central bank is changing its current stance on policy rate. When the policy takes place, the central bank will keep interest rate corridor within narrow limit of 75 basis points above and lower limits.
At present the central bank uses BI Rate as reference rate which is currently standing at 6.75 percent, which applies for 12 months period. Meanwhile, the BI 7-Day Repo Rate currently stands at 5.50 percent, which applies for 7 days. From Agust 19, the reference rate will be replaced by the 7-Day Repo Rate, meaning that the policy rate will shift from 1 year tenor (360 days) to a tenor of 7 days.
BI said by using short-term reference rate, the changing in policy rate of the central bank can have immediate effect in the financial industry, in particular banks interest rates, both for lending and deposit rates.
So far this year, the central bank has cut BI Rate three times (75 basis points) however, it still has limited impact on the banking industry’s rates.
The other reason why the central bank decided to change its policy rate instrument is partly due to stronger inflow of capital`which lead to wider gap between BI Rate and Interbank Overnight Rate (PUAB). As a result of inflow of funds, the overnight rate is currently very low, closer to deposit facilities and far below BI Rate.
In addition, there is no structure yet for PUAB rate for tenor of three months to 12 months. As a result, the transmission of Bank Indonesia’s policy rate is less effective. For this reason,the central bank tries to make its reference rate to a tenor that can be used as reference by financial industry’s money market, that is shorter tenor.
Mirza added that as part of this policy, the central bank is currently working closely with the Financial Services Authority (OJK) to issue new money market instruments as a move to deepen the country’s financial market industry.
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