TheJakartaPost
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Policy rate and banking liquidity
For four consecutive months, Bank Indonesia (BI) has cut its benchmark interest rate, the BI seven-day reverse repo rate, by 100 basis points (bps) to 5 percent. BI’s aggressiveness in easing its money policy is not without reason. However, cutting interest rates when banks are experiencing liquidity problems seems to be unusual. The big question here is whether the cut in the policy rate is effective in improving the liquidity of banks.
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The Bank Indonesia building on Jl. MH Thamrin in Central Jakarta. (Shutterstock.com/Harismoyo )
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or four consecutive months, Bank Indonesia (BI) has cut its benchmark interest rate, the BI seven-day reverse repo rate, by 100 basis points (bps) to 5 percent. BI’s aggressiveness in easing its money policy is not without reason.
First, the inflation rate remained under control, estimated at the range target of 2.5 to 4.5 percent throughout this year.
Second, investment returns on domestic financial assets are still attractive to foreign capital. Portfolio capital inflows until early October reached Rp 192.6 trillion (US$13.3 billion).
Third, the position of foreign exchange reserves at the end of September was recorded at $124.3 billion, equivalent to financing 7.2 months of imports or seven months of imports plus payment of government foreign debt. This amount is above the international adequacy standard of thee months of imports.
Fourth, the exchange rate also shows stability. In October, the rupiah saw a 1.18 percent appreciation point-to-point from September. With this development, the rupiah booked a 2.5 percent rise during the first 10 months of the year.
Fifth, the policy rate cut is needed to stimulate domestic economic growth amid slowing global economic conditions.
Supported by the stability of several key macroeconomic variables above, BI decided to ease the money policy as a preemptive measure. The policy rate cut is also consistent with the relaxation of loan-to-value for property and motor vehicles and of the macroprudential intermediation ratio for Islamic banking.
