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Bank Indonesia, the country's central bank, says it may start
setting the overnight lending rate as the new benchmark for the money
market by June, replacing the current reference rate on its one- and
three-month Bank Indonesia Certificates (SBI).
"We will need about three months to serve as a transition period," Bank
Indonesia Governor Burhanuddin Abdullah told reporters Wednesday.
Burhanuddin further said that BI planned to issue shorter-maturity
bills to provide more depth to the local market and provide it with a
better yield curve.
The overnight lending rate is the interest rate banks use to borrow and
lend one-day funds between themselves. A central bank can use it -- by
setting a target rate for it -- as a monetary policy instrument to
influence market liquidity.
Deepening the local overnight lending market could help BI provide an
alternative location for banks to park their excess funds, but based on
a shorter cycle so as to avoid the funds being idle for too long.
BI currently uses its SBI sales and banking sector reserve requirements
as its main tools for influencing money supply. It sets a BI rate
target for the SBIs, which is also used as a benchmark for bank lending
rates, thereby eventually influencing inflation and growth.
The fact that the SBIs currently held by the banking sector are worth
Rp 235 trillion has been the subject of criticism lately as it leads to
too much money being taken out of circulation, thus affecting growth.
BI Deputy Governor Aslim Tadjuddin said previously that the central
bank was considering gradually replacing the SBI mechanism with
government short-term treasury bills, with the first issues of such
bills likely in April, July and December of this year.
Proceeds from the sale of government treasury bills -- as with other
bonds -- can be used to support government spending, such as financing
infrastructure projects, although a portion must also be reserved to
support the monetary policy purpose of such bills.
Bank Mandiri treasury director Thomas Arifin was quoted by Bloomberg as
saying that BI's plan would benefit the market, and result in the
creation of a better yield curve as a result of the availability of
more market instruments.
Meanwhile, Danareksa Research Institute, the research arm of investment
house Danareksa, said that switching to the overnight lending rate and
shorter-term bills would take some time considering the large number of
outstanding SBIs in circulation.
BI would have to purchase enough of the new treasury bills from the
secondary market to replace its own SBIs, Danareksa said in its
analysis. It would also need to be prudent in doing so in order to
avoid pushing up the money base and inflation.
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