While the system is in overall liquidity surplus

15 Sep While the system is in overall liquidity surplus

Indonesia starts on long road to fix its dysfunctional money markets

JAKARTA, April 19 (Reuters) Indonesia central bank has taken a first step to fix the country dysfunctional and often volatile short term money markets but the journey will be long.

Frustrated Canada Goose Online by futile attempts to push down the high cost of funds, Bank Canada Goose Jackets Indonesia (BI) is shifting in Canada Goose online August to a seven day operating rate as its policy rate, abandoning the current 12 month reference Cheap Canada Goose vests canadian goose jacket one.

The present policy rate is 6.75 percent. At the last auction for one week reverse repo contracts, cheap canada goose uk BI offered 5.50 percent.

Bankers say Canada Goose Parka the benchmark switch will help canadagooseoutleta canada goose clearance BI influence rates, which its recent easing canada goose uk shop moves including cutting the policy rate by 75 basis points this canada goose coats year have failed to do.

However, a host of other issues need to be resolved so that signalling by BI what bankers call will become effective, and gear up banks to lend more to lift the sluggish economy.

BI has to end a shortfall of free cash in the banking system and the absence of tools and products for markets to price that cash.

MORE PRODUCTS, MORE REPOS products, such as repos, swaps, facilities to liquidate assets and uk canada goose to ensure liquidity is available for banks, would give comfort for banks to extend duration or lengthen the interbank borrowing or lending tenor, said Wiwig Santoso, treasury director at PT Bank canada goose factory sale DBS Indonesia in Jakarta.

Andr de Silva, HSBC head of emerging market rates, wrote that he expects BI will have to conduct large reverse repo auctions to encourage banks to place excess cash in those repos, rather than in bills or canada goose short term canada goose clearance sale bonds or the central bank deposit facility known as FASBI.

Other analysts believe BI will also need to ensure sufficient foreign capital inflows to facilitate active trading in the money markets. Although BI has cut banks reserve requirement ratio by 150 basis points since late 2015, more reductions might be needed to inject cash into the money markets, canada goose uk black friday they say.

a while Canada Goose Outlet the central bank has been uncomfortable with the growing disconnect between the overnight borrowing rate and the policy rate, Taimur Baig, Deutsche Bank chief economist for Asia, wrote canada goose coats on sale to clients.

short end of the market has also been subject to frequent episodes cheap Canada Goose of high volatility. While the system is in overall liquidity surplus, it is also fragmented and dysfunctional, Canada Goose sale with surplus banks not lending to deficit banks, he said.

GOING INDIA WAY? Just as India recently assured markets that shortages of rupee liquidity will end, some analysts expect BI at a meeting on Thursday to make a similar pledge on canada goose black friday sale rupiah.

Lifting a leaf out of India policy book, BI also said last week it will narrow the overnight policy rate corridor.

Analysts think these measures could gradually force lending rates lower. Policy uk canada goose outlet transmission has been ineffective because there are hardly any debt instruments or transactions in buy canada goose jacket the one year tenor. Bank lending rates average at least 5 percentage points above the canada goose store 6.75 percent current policy rate.

When the policy rate is the 7 day reverse repo rate, at which BI absorbs excess buy canada goose jacket cheap cash from banks, it could gradually lower that at its auctions.

BI insists that this move will leave the Canada Goose Coats On Sale policy stance unchanged, the fact of the matter is that as the policy is implemented, banks cost of funding will effectively decline, Baig said.

But the priority, analysts say, is to deepen the money market in Southeast Asian largest canada goose uk outlet economy. With an average daily turnover of about 12 trillion rupiah ($900 million), Indonesia has one of the region least active money markets.