Adios, SBIs

Bank Indonesia is going to scrap the SBI papers (The Jakarta Post, 4/1). The SBIs are short term promissory notes used by the central bank as part of its open-market operations. Thus far, however, these certificates have served more as safe haven to many investors (and even banks) as it carries relatively low risks with more certain yields. Scrapping this will leave the investors with government debt papers - those with higher risks.

As SBI is no longer an effective tool to control the money supply, this move is justified. It obviously will help the central bank cut the costs of its market operation. However, as the alternative, ie the government debt papers, carry higher risks, banks would be more careful. As a consequence, some banks might hedge against the higher uncertainty by keeping interest rate high. These days Bank Indonesia has been urging banks to lower their interest rates, following the consecutive cuts in the central bank's policy rate. While this stands on a shaky ground for justification, the central bankers should realize that scrapping SBI papers might not be in-line with their other objective to reduce the interest rates.