Monetary Operations by Bank Indonesia
Description I Definition and Objectives I Monetary Operations Process I Improving Monetary Operations
To achieve the overriding monetary policy objective, Bank Indonesia has implemented a monetary policy framework for management of interest rates (interest rate target). The policy rate, commonly known as the BI 7DDR, is adopted in the Board of Governors Meeting at Bank Indonesia. At the operational level, the BI 7DDR is reflected in movement in the Interbank Overnight (O/N) Rate.
The interbank money market is the activity of lending and borrowing money between one bank and another bank. An interbank rate represents the price formed in a deal between parties lending and borrowing funds. Activity on the interbank is conducted over the counter (OTC) through deals between borrowers and holders of funds arranged without passing through an exchange floor. Interbank tenors range from one working day (overnight) to one year.
If movement in the overnight interbank rate does not vary far from the anchor (the BI 7DDR), Bank Indonesia will work consistently to safeguard and fulfil the liquidity needs of the banking system while maintaining the equilibrium for formation of fair, stable interest rates. The liquidity needs of the banking system are estimated by taking into account autonomous factors such as government operations, maturity of OMO instruments and standing facilities and changes in currency outside banks. These factors can have an expansionary or contractionary impact on money market liquidity.