An office worker walks through Jakarta's Kuningan business district on April 3. (Antara Photo/Dhemas Reviyanto)

Bank Indonesia Reveals Six Monetary Policies to Keep Financial System Stable

BY :HERMAN

MAY 11, 2020

Jakarta. Since the coronavirus crisis began, Bank Indonesia has been strengthening its policy mix to stabilize the rupiah, control inflation, support financial system stability and prevent a further decline in economic activities by working closely with the government and the Financial System Stability Committee, or KSSK.

Bank Indonesia Governor Perry Warjiyo revealed on Monday the central bank's policy mix contains six essential points.

The first is to lower its seven-day reverse repo rate twice by 25 basis points to 4.5 percent.

"The reduction is consistent with the low and controlled inflation forecasts within the target range of 3+1 percent to support the national economic recovery," Perry said in an online press conference.

At its board of governors' meeting on April 13–14, Perry said the central bank had decided to maintain its seven-day reverse repo rate seeing the need to prioritize interest rate policies to keep the rupiah stable in the short term.

However, the central bank said a window is still open for future interest rate cuts once financial market uncertainties have begun to die down.

The second point is to stabilize and strengthen the rupiah by intensifying interventions in the spot market, domestic non-delivery forward market and by buying bonds in the secondary market.

Indonesia's relatively large number of foreign exchange reserves is behind this policy.

Bank Indonesia has also established bilateral swap and repo line cooperations with several central banks in other countries, including the United States and China.

"The exchange rate stabilization measures have strengthened the rupiah, going from nearly Rp 17,000 per US dollar [earlier during the coronavirus crisis] to under Rp 15,000 per US dollar today. Bank Indonesia believes the current rupiah exchange rate is fundamentally undervalued. Going forward, it will stabilize and strengthen," Perry said.

The third point in the policy mix has Bank Indonesia continuing to expand instruments and transactions in the money market and foreign exchange market by providing more hedging instruments against the rupiah through domestic non-delivery forward transactions, increasing foreign currency swap transactions and providing term repo for banking needs.

The fourth point has the central bank injecting massive quantitative easing into the financial market and banks to encourage financing for businesses and kickstart a recovery of the national economy,

So far in 2020, Bank Indonesia has injected around Rp 503.8 trillion into the financial system by buying bonds in the secondary market, providing extra liquidity for repurchase agreement, foreign currency swaps and a reduction in the rupiah statutory reserve requirement.

The fifth point in the policy mix is to release macroprudential policies to encourage banks to finance businesses through reducing loan-to-value ratio provisions, macroprudential intermediation ratio (RIM) and lowering the rupiah statutory reserve requirement for business financing – especially for export-import operators and MSMEs – to counter the impact of the coronavirus crisis.

The last point in the mix is to ease payment constraints for both cash and non-cash payment systems to encourage more economic and financial transactions.

"This is done by encouraging people to make more non-cash transactions, such as using electronic money, internet banking and QRIS [QR Indonesian Standard]," Perry said.

SHARE