KONTAN.CO.ID - JAKARTA. Bank Indonesia's (BI) plan to no longer issue 12-month notes in its monetary operations will help its efforts to lift economic growth by guiding liquidity away from the popular instrument and back to the market, a senior official said on Wednesday.

Last week, BI said it would stop the issuance of the 12-month Bank Indonesia Certificate, known as SBI, and offer 12-month reverse repurchase of government bonds in its monetary operations, a move intended to strengthen policy transmission.

The change to be implement from Oct. 4 followed a third interest rate cut by the central bank in three months and relaxation of lending rules, as it stepped up efforts to cushion the domestic economy from the impact of the global economic slowdown.

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Commercial banks usually prefer SBI as prices of the instrument are less volatile compared with government bonds, leading to a concentration of funds in that instrument, Nanang Hendarsah, BI's head of monetary operation, told Reuters.

BI currently uses government bonds in monetary operations to mop up excess liquidity in the banking system through reverse repurchase of bonds with maturities ranging from seven days to nine months.

Some 105 trillion rupiah ($7.42 billion) of banks' excess liquidity - or around a third of their total funds in BI's monetary operation instruments - is parked in SBI.

"We are guiding the market towards instruments with shorter duration. Why? Because in the current condition, when people have enough liquidity, we don't want it locked up in longer term instruments, so it's more flexible," Hendarsah said.

Once the change takes effect, Hendarsah predicted banks would shift funds to short term treasury bills, or sovereign bonds with 2- to 3-year maturities, or BI's reverse repos with 2-week to 1-month tenures.

However, what BI wanted was for banks to use their excess liquidity to buy bonds in the secondary market or commercial debt, he said.

"It's better for liquidity not to go back to BI. It's better that it comes back to the market" and support economic expansion, Hendarsah said.

BI may have to increase its sovereign bond ownership due to the planned change, he said without elaborating.

As of Sept. 24, the central bank owned 241.7 trillion rupiah of sovereign bonds or 9.13% of tradeable government securities.

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An increase in BI's bond purchases may reduce the foreign ownership level in the bond market, which as of Tuesday stood at 39%.

BI estimates Southeast Asia's largest economy will grow 5.1% in 2019, and has forecast growth in 2020 of 5.1%-5.5%.

Editor: Herlina Kartika Dewi