Download
this document in PDF file
Tools and
Operations
The central bank has four main tools for
conducting monetary policy: open market operations, setting discount
rates, setting the statutory reserve requirement, and regulating
credit or financing. Open
market operations are the tools used by Bank Indonesia (BI) on a
day-to-day basis to absorb or provide liquidity to the market as
needed. For example, if
there is too much liquidity, BI will step in by either selling debt to
the market or providing interest bearing accounts for banks to put
their cash into.
Since growing economies require more cash, most
central banks, such as the U.S. Federal Reserve, are continuously
adding liquidity to the market. Indonesia,
however, has experienced a “liquidity overhang” or too much
liquidity in the system since the 1998 crisis, since banks hold
government bailout bonds but are reluctant to lend.
The liquidity overhang should decrease naturally over time,
although it does sometimes constrain BI’s ability to respond to
macroeconomic shocks by limiting the amount of liquidity that can be
added at any given time.
BI’s conducts regular
and irregular open market operations.
Regular operations include one and three month SBI auctions,
the FASBI deposit facility, SBI repos (repurchase agreements) and the
SWBI, or Wadiah Certificate, which is an SBI using sharia principals.
Irregular operations are Fine Tuning Operations (FTO).
Chart 1: OMO Activities, Outstanding and Interest
rate Development
(December 2003 – May 2005)
Source: Bank Indonesia
Bank Indonesia Certificates - SBI
Chart 2: SBI Auction Process
Source: Bank Indonesia
FASBI
The Fasilitas Bank Indonesia (FASBI) deposit
facility is BI’s rupiah deposit facility, in which banks can deposit
funds with BI for one to 14 days and receive interest.
(In many countries, this deposit rate is often used to set a
floor for all other interest rates and acts as the central bank’s
discount rate.) BI
previously offered only a seven-day FASBI with a set interest rate of
7.25%. Effective August
31, 2005 BI increased its FASBI interest rate by 100 bps to 8.5%.
BI phased out an overnight FASBI
window in January 2005. This
has led to increased volatility in the overnight interbank rate, i.e.,
the rate at which banks lend to one another.
Chart 3: FASBI Process
Source: Bank Indonesia
Repo Instrument
BI also provides repos, or short-term loans to
banks in exchange for SBIs. The
SBIs act as collateral for the loan; when the loan matures, the bank
repurchases the SBIs back from BI.
BI phased out this instrument on August 22, 2005 and its
function will be replaced by another expansion instrument called
Fine-Tune Expansion (FTE).
The
Master Repurchase Agreement, which was signed by five banks on
June 15, 2005 allows market players to undertake repo transactions
more freely. The
central bank is still unable to provide reverse repos, since it holds
a limited amount of government securities – just 7.4 trillion rupiah
purchased in three operations in 2005 (April – August).
BI phased out an
overnight FASBI window in January 2005.
This has led to increased volatility in the overnight interbank
rate, i.e., the rate at which banks lend to one another.
Irregular Operations
The FTO was introduced in April 2005 and is used
on an “as needed” basis for both monetary contraction (FTK) and
expansion (FTE) purposes. These
instruments can be used for one to 14 days, although so far BI has
kept the maturities under one week.
The FTK rate is fixed by BI and its
cap is the one-week FASBI rate.
The FTE would be a short-term lending facility to provide
liquidity: only SBI and government
bonds can be used as underlying assets for this transaction.
Download
this document in PDF file
***
|
