US Banks See BI On Hold, Weigh In On New Monetary Tool

US banks weigh in on the BI outlook (on hold for the rest of this year is the bias) and the new tool BI introduced to manage system liquidity and to support the local FX.

• Goldman Sachs: "In the Q&A session, asked about the central bank's monetary policy direction, the Governor noted that BI's baseline scenario is for the Fed to increase policy rates one more time (25bp hike in September) with risks skewed towards an additional hike thereafter. The Governor emphasized that while this may lead to a stronger dollar and weaker IDR, the policy rate is not the only tool the central bank has to support the currency. The Governor also introduced a new monetary tool -- Bank Indonesia IDR securities or SRBI -- to manage banking system liquidity conditions, which will start trading on September 15. This is a short term instrument (6, 9, and 12 month tenor) and will be collateralized with BI's holdings of government bonds as its underlying asset. The SRBI will be transacted via variable rate tender auctions and will be marketable in the secondary market.
• The stated objective of the introduction of this new instrument is to deepen domestic financial markets and encourage foreign portfolio inflows to support the currency. This new instrument will replace the BI reverse repo operation (6, 9, and 12 month) and (outright) operation twist. Going forward, despite well-behaved inflation, we continue to expect Bank Indonesia to keep the policy rate on hold until the end of the year given policymakers' focus on IDR stability. The next scheduled BI meeting is on September 20-21."
  
• J.P. Morgan: "Given the recent developments in the balance of payments and growth, the bias for the policy rate has shifted to a firm hold from risk of easing in 2H23. The central bank today also announced the introduction of tradeable SRBI (Sekuritas Rupiah Bank Indonesia, Bank Indonesia Rupiah Securities), which will replace the non-tradeable Reverse Repo SBN for it sterilization operations and the first auction will be held on 15 September. As of July, RR SBN’s accounted for IDR500.5 trillion out of IDR639.9 trillion (3% of GDP) in sterilization instruments. An alternative instrument for foreign investors as bond issuance slows – On the former, the pace of government debt issuance has turned negative on a three-month run rate and, given the stock of treasury cash at IDR710 trillion in July (3.4% of GDP), has room to pause issuance. Subsequently, the incremental offshore participation in debt markets could slow in line with issuance.
• Set in this context, the SRBI provides a facility for foreign investors to participate in the local markets and thus support for capital flows. Watching foreign participation and bank behavior – Given the intent, we will be watching the yield of the SRBI and whether it succeeds in facilitating a rise in deposit rates and also of the take-up rate of the SRBIs by foreign investors. We are also mindful of the behaviour of banks; that instead of paying up for deposit liquidity, banks may instead opt to more aggressively sell their AFS holdings of government bonds, which remain elevated at IDR1,728 trillion as of July (8.2% of GDP)."