Bank Indonesia Said to Adopt Reverse Repo as Benchmark Rate

  • Bank Indonesia says to announce new policy framework Friday
  • Repo policy likely to take effect in August, BNI says

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. Panji Irawan, a director at state-owned PT Bank Negara Indonesia, confirmed the details and said it will help lower bank lending rates.

The shift is being made to enhance the effectiveness of its policy changes to influence markets, according to the people familiar with the matter. Bank Indonesia will strengthen its policy framework and announce it on Friday, said Andiwiana Septonarwanto, its deputy director of communications, while declining to comment on any specific changes. 

‘Very Supportive’

“After it becomes effective in August, we think lending rates will be dragged down,” said BNI’s Irawan. “The new policy is very supportive of efforts to lower lending rates.”

The yield on Indonesia’s 20-year rupiah bonds reversed an earlier advance to drop five basis points to 7.77 percent by the market close. The rupiah rose 0.1 percent to 13,114 a dollar, according to prices from local banks.

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.

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 percent rate.

Government Pressure

Indonesia’s central bank has come under pressure from the government to reduce interest rates to help spur an economy that grew last year at its slowest 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.

“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.

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 percent this year and the reserve requirement ratio by 150 basis points, he said.

The interest-rate cuts have helped attract almost $4 billion into local currency sovereign bonds, leading the rupiah to strengthen for four straight months.

“By moving to reverse repo, Bank Indonesia might deepen and improve the activity in the money markets too,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. in Singapore. “That will increase the exchange of liquidity between smaller banks that need it and larger ones that have an excess of it.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE