Bank Indonesia explains policy mix, projects Rp90 trillion liquidity boost

Bank Indonesia (BI) estimates its planned reserve changes will add Rp90 trillion in liquidity, as it defends a policy package that combines measures to hold, raise and lower different monetary settings.

The package left the benchmark interest rate steady but increased the rate on overnight deposits at the central bank. It also included planned reductions in bank reserve requirements and further discounts on foreign-exchange hedging. BI said the measures were intended to help its decisions reach the broader economy more effectively.

Firman Mochtar, BI's head of economic and monetary policy, said the deposit-rate increase made the interest-rate corridor symmetrical again. Both facility rates now sit 75 basis points from the benchmark. The deposit-rate gap had been 100 basis points, which he linked to government cash placements at commercial banks.

Reserve requirements are scheduled to fall by a cumulative 200 basis points by December. With revisions to BI's liquidity incentive scheme, the effective ratio will reach about two per cent, approximately 100 basis points lower than before. Firman said the projected liquidity addition was consistent with economic activity and the policy rate.

Erwin Gunawan Hutapea, BI's head of monetary management, said banks were being encouraged to choose instruments with shorter maturities rather than put surplus cash into SRBI rupiah securities. He said outstanding SRBI had declined to below Rp950 trillion from Rp1,096 trillion in July.

Bank of America economists, who initially questioned the combination, subsequently said the measures were less contradictory than they appeared and did not necessarily indicate less willingness to raise the policy rate if needed.