B

ank Indonesia’s (BI) monetary policy is likely to face a rocky road in terms of its effect on real sectors despite high hopes that the upcoming new benchmark rate will smoothen such transmission.

The central bank is planning to implement the seven-day reverse repurchase (repo) rate, which currently stands at 5.25 percent, on Friday to replace the current 6.5 percent 12-month rate, known as the BI rate.

After the change, the central bank hopes its lending and deposit rates, applied to banks who borrow from and keep money in it, would respectively hover at 75 basis points (bps) above and below the new rate.

Currently, the lending facility rate stands at 7 percent while the deposit facility is 4.5 percent, leaving a relatively large gap between them.

BI is of the view that the new rate will be transmitted faster to the banks’ deposit and lending rates compared to the current one because banks involved in the interbank money market actively used the central bank’s short-term facilities, including the seven-day reverse repo rate, in managing their excess funds.

“The excess funds usually pile up at the overnight to two-week tenures hence BI decided to use the one-week tenure, which is the best rate to reflect excess liquidity in the market,” BI senior deputy governor Mirza Adityaswara said Monday in a discussion.

As much as Rp 14.45 trillion (US$1.1 billion) of the total excess funds worth Rp 14.5 trillion transacted daily in the short-term tenures as of Aug. 12, according to BI data on the interbank money market daily transaction.

A central bank’s rate ideally should reflect the real rates in the short-term money market to ensure an effective transmission of its monetary policy to the real sector, Mirza added.

Although BI has lowered its benchmark interest rate 100 bps over a total four cuts so far this year, deposit and lending rates at banks have lazily moved southward by only 80 bps and 45 bps, respectively.

Theoretically, Mirza said, the new rates would more quickly translate into banks’ deposit and lending rates. However, in fact its transmission would remain dependant on the behavior of depositors, banks and other investment instruments’ rates.

“We can’t control the market,” he said.

Banks, however, rely heavily on time deposits as their source of liquidity because around 55 percent of the more than Rp 4,000 trillion in funds kept in the banks is from time deposits, said state-owned lender Bank Mandiri finance and treasury director Pahala N. Mansury.

“The time deposits are bigger liquidity sources than the lending facility [from Bank Indonesia],” he said in the discussion.

Bank Central Asia (BCA) chief economist David Sumual, meanhwhile, said the government should add more short-term investment instruments to enable more liquid transactions at those tenures. It also needed to improve the economic structure and fundamentals to support BI’s monetary policy.

“Don’t think this [the new rate policy] as a magic potion that can fix all problems,” he said.