BI to ditch benchmark rate, plans new one

Con­sumers and com­pa­nies will be on a spend­ing binge soon as the cen­tral bank has plans for a pol­icy that will see bor­row­ing costs de­crease to an all-time low, a move with a far reach­ing im­pact to all quar­ters of the econ­omy.

Bank In­done­sia (BI) is slated to aban­don its bench­mark in­ter­est rate, put in place in 2005 and set on monthly ba­sis with an em­pha­sis on a in­fla­tion ex­pec­ta­tions rather than on money mar­ket mech­a­nisms.

BI will in­stead see its mon­e­tary pol­icy rely on a seven-day re­verse re­pur­chase (repo) rate for the new bench­mark to in­flu­ence bor­row­ing costs.

As the repo is tied well to the money mar­ket, it ac­cu­rately re­flects sup­ply and de­mand when com­pared to those of the BI rate, which has very lim­ited im­pact on the mar­ket.

The seven-day repo has a rate of 5.5 per­cent with im­me­di­ate po­ten­tial to de­cline to 4.8 per­cent, ac­cord­ing to an­a­lysts.

That is lower than the cur­rent BI rate of 6.75 per­cent, which BI will need around five months to scale down to match the cur­rent repo rate.

The new bench­mark is set to take af­fect in Au­gust or Septem­ber.

Such a bench­mark mat­ters to the econ­omy as it sets the floor for banks to de­cide in­ter­est rates for bor­row­ing and de­posit­ing.

It will also play a role in the cost of do­ing busi­ness in In­done­sia; the lower the rate, the more com­pet­i­tive the econ­omy.

In com­par­i­son, bench­mark in­ter­est rates in Thai­land, China, In­dia and the Philip­pines stand at 1.50 per­cent, 4.35 per­cent, 6.5 per­cent and be­tween 4 and 6 per­cent, re­spec­tively.

While BI of­fi­cials refuse to com­ment on the planned pol­icy, set to be an­nounced on Fri­day, Vice Pres­i­dent Jusuf Kalla spokesman Hu­sain Ab­dul­lah told The Jakarta Post that the gov­ern­ment was aware of the plan.

“Although we have no au­thor­ity over BI and its mon­e­tary pol­icy, which by law is in­de­pen­dent from the gov­ern­ment, the plan has been in­ten­sively dis­cussed with us, of­ten at the res­i­dence of the Vice Pres­i­dent,” said Hu­sain on Tues­day.

“It’s about time BI takes ag­gres­sive mea­sures to dras­ti­cally lower in­ter­est rates. The gov­ern­ment hopes for sin­gle-digit loan rates by year-end.”

Ac­cord­ing to re­cent data com­piled by ma­jor banks, the cor­po­rate seg­ment is of­fered an an­nual in­ter­est rate of 11.1 per­cent, while re­tail, mort­gage and non-mort­gage con­sumer loans are of­fered at 12 per­cent, 11 per­cent and 12.2 per­cent, re­spec­tively.

Amid the global eco­nomic slow­down, Vice Pres­i­dent Jusuf Kalla has been lead­ing the cam­paign to en­cour­age BI to lower its bench­mark rate to spur the slug­gish econ­omy by en­cour­ag­ing the pub­lic to con­sume more.

The coun­try hinges heav­ily on the con­sump­tion of its 250 mil­lion peo­ple to drive its econ­omy. Lower in­ter­est rates will en­cour­age peo­ple to bor­row and con­sume more, and push com­pa­nies or in­di­vid­u­als to in­vest in pro­duc­tive as­sets.

BI’s planned pol­icy bodes well with the mar­ket as an­a­lysts cite the cur­rent BI rate as ir­rel­e­vant to ac­tual con­di­tions in the fi­nan­cial mar­ket.

Mac­quarie Bank fixed in­come and cur­ren­cies strat­egy head Nizam Idris said that be­cause the BI rate was not rel­e­vant to the mar­ket, it en­cour­aged big lo­cal banks to hoard liq­uid­ity at the ex­pense of smaller ones that com­peted harder for the funds.

That has cre­ated im­bal­ances in the mar­ket and thwarted ef­fec­tive mon­e­tary pol­icy trans­mis­sion.

“A deeper money mar­ket and a mar­ket-based bench­mark in­ter­est rate would likely en­cour­age a bet­ter trans­mis­sion of the pol­icy rate to ac­tual cost of funds in the econ­omy,” he said.

Un­der the repo bench­mark, which is al­ready part of BI’s mon­e­tary in­stru­ment, the cen­tral bank sells gov­ern­ment debt pa­pers to the mar­ket with a deal to buy them back in seven days with a 5.5 per­cent rate.

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