Jakarta, Aug 22 (Antara) - The Indonesian central bank, Bank Indonesia (BI), decided on Friday evening to officially use the 7-Day Reverse Repo Rate as its benchmark reference rate, replacing its previous 12-month reference BI Rate.
"In order to make the monetary policy more effective, Bank Indonesia has decided to use the seven-day reverse repurchase (repo) rate as a benchmark reference replacing the BI Rate," BI Governor Agus Martowardojo said at a press conference while explaining the results of the BI Board of Governors' meeting in Jakarta on Friday.
Since mid-April 2016, the BI has begun a transitional period for the change of its benchmark interest rate instrument from the previous BI Rate to the new 7-Day RR rate.
During the transitional period until August 2016, the central bank was still using the BI Rate as its benchmark reference rate.
The BI board of governors' meeting on August 18-19, 2016, decided to officially use the BI 7-Day Reverse Repo (RR) Rate, which was set at 5.22 percent. The Deposit Facility Rate (DF Rate) was set at 4.5 percent, while the Landing Facility Rate (LF Rate) was lowered by 100 basis points from seven percent to six percent.
Besides this, the BI also maintained a symmetrical and narrow interest rate corridor where the lower limit of DF Rate is set 75 basis points below the 7-Day RR rate and the upper limit of LF Rate is set 75 basis points above the 7-Day RR Rate.
The decision is in line with the efforts to maintain the macroeconomic stability by continuously preserving the momentum of domestic economic growth amid weakening global economic performance.
Agus is convinced that with a seven-day benchmark reference rate, the BI monetary policy transmission will be faster in affecting interest rates in the money market, including the banking interest rates.
"The previous policy reflected a 12-month tenure for interbank money while the 7-Day RR Rate reflects interbank money with a seven-day tenure," the BI governor added.
According to the BI, the new benchmark has stronger relation with the money market rates. It is transactional in nature and will strengthen the money market.
During the transitional period, the BI Rate was still used as a benchmark, together with the 7-Day RR Rate. The strengthening of the monetary operations through this system is normal and is seen as a best practice by various central banks in carrying out monetary operations.
The monetary operation schemes undergo improvements to increase their effectiveness, particularly when it comes to maintaining price stability.
The efforts to strengthen the monetary operation schemes include conducive macroeconomic conditions which, of late, provided momentum for reinforcing monetary operation schemes.
BI began introducing the 7-Day RR Rate last April. At the BI's board of governors' meeting on April 21, 2016, the BI Rate was fixed at 6.75 percent and the BI Repo Rate at 5.50 percent.
In May, the board of governors' meeting maintained the 6.75 percent and 5.50 percent rates, respectively. In June, BI cut these down, respectively, to 6.50 percent and 5.25 percent, and in July the board of governors maintained the BI Rate at 6.50 percent and the 7-Day RR Rate at 5.25 percent.
BI Senior Deputy Governor Mirza Adiyaswara pointed out that the 7-Day RR Rate, which is the symmetrical rate formula for deposit and BI reserve funds for banks, will effectively cut bank funding costs, which will in the end lower the interest rate of banking credits.
Moreover, banks will have ample opportunities to enjoy other liquidity facilities from the BI funding facilities as the lending facility (LF) rate will be kept at a maximal rate of 75 basis points above the 7-Day RR Rate.
If the deposit interest rate could be lowered, banks will have ample room to also lower the interest rates of their credits, as the burden they have to bear due to their credits will decline.
However, the decline in the deposit interest rate will depend on the banks' trust on depositors that they will not withdraw their money after the banks lower the deposit interest rate, he stated.
"Hence, the lowering of the lending rate will also depend on the behaviors of depositors and other factors. For this, banks should provide flexible pricing to them," said Mirza.
In the meantime, Vice President Jusuf Kalla hailed the imposition by BI of the 7-Day RR Rate as its new benchmark reference rate.
"The government, BI, and the Financial Service Authority had all agreed to use it some six months ago. The 7-Day RR Rate will be used to replace the BI Rate system. It is lower because it is only for seven days," Kalla stated at the Vice Presidential Office on Friday.
Kalla noted that with the use of the 7-day RR benchmark reference rate, the banking rate could go down to some seven percent by June 2017.
The vice president remarked that the policy is one of the ways to help small- and medium-scale businesses, which had so far become the victims of high interest rates. ***3***
(A014/INE)EDITED BY INE(T.A014/A/BESSR/A. Abdussalam) 22-08-2016 20:44:0 |
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