UOB Flash Note : Indonesia – Change in Benchmark Policy Rate

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Bank Indonesia (BI) formally announced a change to its benchmark policy rate to the 7-day reverse repo rate from the BI rate today. The BI rate has been the benchmark policy rate since July 2005.

The central bank will also narrow the FASBI-Repo corridor to 150 bps from 250 bps. Based on the current 7-day reverse repo rate at 5.5%, it implies that the O/N deposit facility (FASBI) rate and lending rates will be at 4.75% and 6.25% respectively, effectively lowering the lending rate from 7.25% while deposit rate is unchanged.

The benchmark rate change will take effect on August 19 and the central bank will announce both benchmark rates in the interim period.

Implications

  • While the BI rate is a reference for the 1-month (SBI) bill rate, the reverse repo rate is more closely linked to money market rates. The move is expected to improve the transmission of monetary policy to money market rates. With a focus on boosting credit growth in the country, BI probably sees this having a greater signaling effect on lending rates. As a comparison, the cut in the BI rate since the start of the year has seen more than 300 bps drop in the 7-day interbank rate from 8.7% at end-2015 to around 5.5% currently.
  • We do not think that the change in the benchmark policy rate implies a one-off easing in monetary policy as these rates apply to different tenors and to different interest rate tools. In addition, the O/N FASBI rate which the central bank announces in its monetary policy along with the benchmark policy rate has already provided the market with a clear guidance on the O/N interbank rate.
  • Bank Indonesia confirmed that there is no change in the policy stance today. After front-loading 75 bps rate cut in the BI rate in 1Q16,we think the central bank will likely remain on easing bias in the coming months but it is likely to stay on hold during the transition period. For the upcoming meeting next Thursday (April 21), BI will probably maintain the BI rate at 6.75% while adjusting the O/N lending rate lower in line with the new FASBI-Repo corridor.

 

 

Implications

  • While the BI rate is a reference for the 1-month (SBI) bill rate, the reverse repo rate is more closely linked to money market rates. The move is expected to improve the transmission of monetary policy to money market rates. With a focus on boosting credit growth in the country, BI probably sees this having a greater signaling effect on lending rates. As a comparison, the cut in the BI rate since the start of the year has seen more than 300 bps drop in the 7-day interbank rate from 8.7% at end-2015 to around 5.5% currently.
  • We do not think that the change in the benchmark policy rate implies a one-off easing in monetary policy as these rates apply to different tenors and to different interest rate tools. In addition, the O/N FASBI rate which the central bank announces in its monetary policy along with the benchmark policy rate has already provided the market with a clear guidance on the O/N interbank rate.
  • Bank Indonesia confirmed that there is no change in the policy stance today. After front-loading 75 bps rate cut in the BI rate in 1Q16,we think the central bank will likely remain on easing bias in the coming months but it is likely to stay on hold during the transition period. For the upcoming meeting next Thursday (April 21), BI will probably maintain the BI rate at 6.75% while adjusting the O/N lending rate lower in line with the new FASBI-Repo corridor.

The post UOB Flash Note : Indonesia – Change in Benchmark Policy Rate appeared first on The Insider Stories.

Source: The Insiderstories
UOB Flash Note : Indonesia – Change in Benchmark Policy Rate

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