Bank Indonesia Defends Mixed Policy Package, Says Rates and Liquidity Moves Are Aligned

Bank Indonesia on Friday rejected market criticism that its latest policy package was confusing, saying the mix of a rate hold, a deposit-rate hike and reserve-requirement cuts is designed to improve how its decisions transmit to the economy. The central bank this week kept its benchmark rate unchanged while raising the overnight deposit facility rate to restore a symmetrical 75-basis-point corridor around the benchmark, a gap previously widened to 100 basis points because of government fund placements in commercial banks. BI plans cumulative reserve-requirement cuts of 200 basis points by December, with an effective reserve ratio of about 2%, adding an estimated 90 trillion rupiah ($4.98 billion) in liquidity. Officials also said BI wants banks to favor shorter-dated instruments over its rupiah securities, known as SRBI, with outstanding SRBI reduced from 1,096 trillion rupiah in July to below 950 trillion rupiah. Bank of America economists, who initially called the mix "hold, hike and cut all at once" and "perplexing," later said the measures were less contradictory than they first appeared.