Bank Indonesia plans to overhaul its main tool of monetary policy, adopting a seven-day reverse repurchase rate as the new benchmark, according to people familiar with the matter.
The central bank of Southeast Asia’s biggest economy will ditch the current reference rate, which isn’t directly tied to money markets, according to the plan scheduled to be announced Friday, said the people, who asked not to be named as the discussions were private, Bloomberg reported.
Bank Indonesia will strengthen its policy framework and announce it on Friday, said Andiwiana Septonarwanto, its deputy director of communications.
With the seven-day reverse repo rate, Bank Indonesia will be using as its benchmark a tool for draining liquidity from the system. The monetary authority sells securities with an agreement to buy them back in seven days. Bank Indonesia currently offers such contracts at a 5.5% rate.
The shift is being made to enhance the effectiveness of its policy changes to influence markets, according to the people familiar with the matter. The central bank is talking to analysts and other stakeholders for policy feedback, Septonarwanto said.
“From the perspective of improving the transmission mechanism of monetary policy, it could potentially be a positive move” as it would make monetary easing more effective in stimulating the economy, said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore.
Monetary authorities around the world use different rates as benchmarks to influence borrowing costs across the economy. The Reserve Bank of India uses a repo rate. In Japan, policy makers have adopted a negative interest rate on a share of funds commercial lenders park with the central bank, in an effort to force them to boost lending.
Indonesia’s central bank has come under pressure from government to reduce interest rates to help spur an economy that grew last year at its slowest pace since 2009. President Joko Widodo said in an interview on Feb. 11 he wanted interest rates to “fall, fall, fall, fall and keep falling” so that the country could better compete with neighbors.
Bank Indonesia sees weak transmission of its monetary policy, Juda Agung, executive director of monetary policy, said at its most recent rate meeting last month. Lending rates only declined four basis points even after the authority cut the benchmark rate by a total of 75 basis points to 6.75% this year and the reserve requirement ratio by 150 basis points, he said.
