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New BI benchmark may drive interest rate cut: OJK
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This picture shows the front of the Financial Services Authority (OJK) building. The OJK will support Bank Indonesia's efforts to reduce the interest rate over the year. (KONTAN/*)
B
ank Indonesia’s (BI) decision to make its seven-day repo rate its new official benchmark starting on Aug. 19 may support the government’s push for banks to bring interest rates for their customers down to single digits by the end of the year, the Financial Services Authority (OJK) has said.
OJK chairman Muliaman Hadad said the office would adjust some policies to support the reduction in interest rates as a follow-up measure to the monetary policy change at the central bank last week.
"The efforts made by Bank Indonesia, in my opinion, should be appreciated, so a relatively low lending rates regime can be realized by the end of this year as planned,” Muliaman said on Tuesday.
He added that the OJK would review the short-term responses to BI’s move in the financial sector. “We will consider and convey [the adjustment],” he added.
Last week, the BI Governor Agus Martowardoko said the central bank would issue both the BI rate and the BI seven-day repo rate within a transition period. After Aug 19, the bank will no longer use the BI rate as a benchmark.
BI’s seven-day repo rate is currently at 5.5 percent, while the BI rate is 6.75 percent. The repo rate reflects a more dynamic measure as it has a short tenor of only one week, compared with the nine-month tenor of the BI rate.
BI will set dynamic deposit and lending rates. The floor and the ceiling rates will be 75 basis points above and below the seven-day repo rate.
Muliaman urged banks to commit to efficiency improvements and cost-cutting to push down their interest rates. He added that the OJK would provide incentives to banks that were able to bring down their net interest margins (NIM).
The incentives would include eased requirements for opening new branches or launching new products, he said.
"The approach is holistic, so the cost of funds could be affected by the seven-days repo rate," he asserted.
Muliaman expressed his confidence that the incentives would get banks to be more efficient and offer loans at lower interest rates.
“Low cost of funds does not necessarily affect credit as long as efficiency does not improve,” he said, adding the incentive policy would be issued next week. (dan)
