Bank Indonesia (BI) is confident that the impact of the decrease in the benchmark rate or the BI Rate is already curbing of bank interest rates. With plans to launch its latest benchmark rate, the BI 7 Days Repo Rate, the central bank is even more optimistic that the impact will be accelerated.
Perry Warjiyo, Deputy Governor of BI, said the effectiveness of BI Rate drop was evident from three indicators. First, bank deposit and lending interest rates, which decreased by 0.8% and 0.45%, respectively in June. This follows the policy of lowering the BI Rate by one percent, and cutting minimum statutory reserves 1.5% early this year. (Read: Two Economic Uncertainties Halt Monetary Easing).
The BI Rate is a benchmark for one-year tenors, and the BI 7 Days Repo Rate for one-week tenors. Banks using the BI Rate or shorter tenors has already has a positive impact, said Perry. The introduction of the BI 7 Days Repo Rate will have more of an impact. Moreover, the Jakarta Interbank Offered Rate (JIBOR) has been set to enable banks to use this new benchmark rate.
“Transmission will be more effective [by using BI 7 Days Repo Rate] for deposits, lending, and on the money market. The finance market tenors of 0-6 months finance markets already follow the monetary interest rate structure,” Perry said after attending the 10th International Conference Bulletin of Monetary Economy and Banking at BI Building, Monday, (8/8). (Read: Last Time as Benchmark, BI Rate Set at 6.5 Percent).
The BI 7 Days Repo Rate is a benchmark interest rate for one-week tenors that will be launched at the Meeting of the Board of Governors on19 August. JIBOR is the average interest rate on unsecured loans and is used for transactions from one contributor bank to another to lend rupiah with specific tenors in Indonesia.
The second indicator is improved transmission through liquidity that is driven by BI Rate decrease, which is also affected by the government’s keeping a lid on fiscal expansion. This means that the government has chosen to cut spending rather than aiming for more tax revenue.
The condition was different in 2015, when the government focused on increasing tax revenue, causing liquidity to tighten. Perry added that the decrease in minimum statutory reserves had also affected bank liquidity.
The third indicator is that BI Rate drop on rupiah is accompanied by high uncertainty. Perry said the strengthening of rupiah was attributed to stable inflation and economic growth recovery, aside from the impact of monetary loosening. Based on these three indicators, Perry was confident the drop in the BI Rate had been effective.
However, Perry admitted that credit growth had yet to increase significantly, despite eased macro-prudential policy. The flat growth is attributed to low demand due to economic deceleration (Read: Banks’ NPL Hike Spreads to Various Sectors).
The budget cut of IDR133.8 trillion will also help boost bank liquidity, because it will mean the government does not have to issue bonds.