JAKARTA - Bank Indonesia has decided to keep its key policy rates at current levels during the central bank board meeting last week. Wisnu Wardana, economist of PT Bank Danamon Indonesia Tbk, provides following comments:
Key Points:
- As expected, Bank Indonesia has decided to keep its key policy rates at current levels during its MPC meeting late last week. BI 7-Day Reverse Repo and Deposit Facility rates were maintained at5.25% and 4.50%, consecutively. Whilst the Lending Facility was slashed by 100bps to 6.00%, to fulfill their promise of a symmetrical corridor.
- The range of 2016 GDP growth forecasted by the central bank has been revised down to 4.9%-5.3% from 5.0%-5.4%, previously. BI seemed concern over the impact of fiscal consolidation, stating that “a government less inclined to spend in the second half of the year could potentially undermine growth this year”. According to their nowcasting projection, 2H16 GDP could reach 5.0% yoy, despite the better than expected second quarter results. Please note that during its last quarterly meeting in May, monetary policymakers had also opted for unchanged policy rates and growth revision at the same time. Leaving room for further easing, yet again (Danamon’s call is for at most 2x25bps cuts).
- We have been flagging that monetary operation term structure needs to be flattened, specifically for the 3 months tenor onwards. BI’s objective of unwinding short term liquidity from overnight money market to longer tenors has gradually taken place. By flattening the belly and end of term structure, banks will be encouraged to provide supply of credit during times of low interest rate environment. This could be achieved by gradually phasing out Fixed Rate Tender mechanism and replaced it with Variable Rate Tender for all but the new benchmark rate. However, given current liquidity condition, we think the structure should be adjusted prior to the change in tender mechanism.
- On the micro policy front, market participants still await for the new time deposit ceiling capped by OJK. Another single cap ceiling would keep the bulk of funds concentrated in the short tenors, amid less incentive for longer tenor placements. We believe alternate formulas are worth to put forth: 1) having multiple ceiling range through various tenor that are linked to a single benchmark (7D RR) or 2) linking each tenor of instrument (e.g. 1M, 3M, and so forth) on the term structure with a range. This would capture and absorb more of the market dynamics as well as enhance efficiency, in our view. (*)