Bank Indonesia to Adopt 7-Day Reverse Repurchase Rate as Key Monetary Tool
The central bank of Indonesia (Bank Indonesia) plans to adopt a new tool of monetary policy that is to replace the existing benchmark interest rate (BI rate). On Friday (15/04), Bank Indonesia will announce and elaborate on the new policy. Earlier, Indonesia's central bank said it was studying the implementation of a seven-day reverse repurchase rate (reverse repo) as the nation's new benchmark that is to influence borrowing costs and market liquidity more effectively. The new policy would mean Bank Indonesia sells securities with an agreement to buy them back within a seven-day period.
The existing BI rate is considered too weak to have an immediate and large impact on Indonesia's lending rates. Juda Agung, Executive Director of Monetary Policy at Bank Indonesia, said the country's lending rates have only declined 4 basis points after the central bank cut its BI rate by a total of 75 basis points in the first three months of the year (to 6.75 percent currently) and the reserve requirement ratio by 150 basis points. The reverse repo is regarded a suitable instrument to regulate the expansion and contraction of liquidity in the market. Repurchase agreements (or repos) are a money-market instrument used to raise short-term capital. Several countries - including Sweden and South Korea - use such a repo as a monetary tool.
Although official information is to be released by Bank Indonesia on Friday (15/04), speculation points to the implementation of the reverse repo in August 2016.
New BI Rate Seven Day Reverse Repo:
• Enhance effectiveness of monetary policy changes to influence market liquidity
• Replaces the current reference rate (BI rate) that is not directly tied to the money markets
• Encourages lower lending rates of local banks
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