Indonesia’s central bank said it will use the seven-day reverse repo rate as its benchmark policy instrument to help spur lending and support growth in Southeast Asia’s biggest economy.

The new benchmark -- which is the interest the central bank pays to borrow from commercial lenders, currently at 5.5 percent -- will replace the 12-month reference rate of 6.75 percent, Bank Indonesia said on Friday. Bloomberg News reported on the move three days ago.

“I want to stress that our monetary stance has not changed,” Bank Indonesia Governor Agus Martowardojo said by video conference from Washington, where he was attending meetings of the International Monetary Fund. “This will enable Indonesia to rise to a new level and become a country that has implemented monetary policy along best practice lines.”

Reducing the reference rate by 75 basis points this year hasn’t been effective in lowering lending rates in the economy to the same degree, frustrating policy makers as they seek to spur an economy hit by falling exports. The new benchmark rate may help the central bank influence money-market rates more directly.

Central banks from Japan to Europe are seeking more ways to stimulate their economies and protect against global shocks. The Monetary Authority of Singapore on Thursday unexpectedly eased its policy stance as economic growth ground to a halt.

NO EASING

“This is a change in target, it is not a stealth easing,” said Glenn Maguire, Asia-Pacific chief economist at Australia & New Zealand Banking Group Ltd. in Singapore. “It appears to be adequately designed to improve the transmission mechanism of monetary policy via deepening money markets.”

Bank Indonesia will also reduce the corridor around the new benchmark rate to 150 basis points from 250 basis points. That will take the lending facility rate, which is the interest it charges borrowers, to 6.25 percent when the new policy comes into effect on Aug. 19, Deputy Governor Perry Warjiyo said. The rate is currently at 7.25 percent.

The overnight deposit rate, known as the Fasbi, stays at 4.75 percent.

Wellian Wiranto, an economist in Singapore at Oversea-Chinese Banking Corp., said the reduction in the lending facility rate was largely a “cosmetic” change and won’t have a significant effect on borrowing.

The central bank had been able to make the changes because of structural reforms that reduced the threat of inflation over the medium term, Martowardojo said.

The economy grew at its slowest pace last year since the end of the global financial crisis in 2009. President Joko Widodo said in an interview in February that he wanted interest rates to “fall, fall, fall, fall and keep falling” so the country can better compete with its neighbors. The country’s exports dropped 13.5 percent in March from a year ago, the statistics agency said on Friday.

“They won’t pre-commit to saying explicitly that they are not going to cut rates in the transition period,” Wiranto said, referring to the current reference rate. “The chance of a rate cut is minimal.”

Source:
courtesy of BLOOMBERG

by Rieka Rahadiana & Herdaru Purnomo

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