Indonesian central bank to use variable rates for auctions

Jakarta

INDONESIA'S central bank will accept variable rates offered by participants of its auctions starting on Feb 1, a move it said will strengthen its monetary operations.

The move will help ensure that the rates Bank Indonesia (BI) pays to absorb market liquidity in auctions reflect market rates, Juda Agung, its executive director of economic and monetary policy, told reporters on Tuesday.

Mr Agung said the measure is part of BI's efforts to make sure that the market has enough liquidity to steer banks to more quickly reduce their lending rates in line with BI's benchmark rate cuts. "We hope this will strengthen our monetary policy transmission to short-term market rates," he said.

Last year, BI cut its benchmark interest rate six times, by a total of 150 basis points, but banks have been slow in following with trims in their lending rates.

Bankers said liquidity was tight near the end of last year and they worried about potential bad debts. Some banks raised deposit rates to attract more clients.

On Tuesday, bankers welcomed BI's measure.

The move is positive and will mean auctions "reflect market levels and give room for adaptation of market liquidity," I Made Budhi Artha, head of global market and corporate treasury at Maybank Indonesia, told Reuters.

He said he was informed variable rates will be used in tenders of monetary instruments with maturities of longer than one week.

The measure will bring auction rates down in the short term because "market liquidity is currently ample", Mr Artha said.

In August 2015, BI changed its auction mechanism to offer fixed rates instead of getting bids from participants to support the then-shaky rupiah. At the time, BI said that by controlling auction rates, it could absorb excess short-term liquidity and prevent its use to speculate against the rupiah.

So far this year, the rupiah has strengthened one per cent against the dollar. REUTERS