Central bankers can roughly be divided into two camps. There are those who thrive on the element of surprise, constantly keeping markets guessing with vague speeches that hawks and doves can get equally as excited about. The Federal Reserve’s Alan Greenspan, who could speak at length without anyone understanding a word, is perhaps the best example. Japan’s Haruhiko Kuroda has carried the torch for the latest generation. Then there are those who value clear communication, trying their best to signal their intentions early to reduce the volatility that can result from policy decisions. Current Fed chair Janet Yellen is firmly in this camp; Amando Tetangco Jr, the recently retired governor of the Philippine central bank, made clarity almost another policy tool. But what about Agus Martowardojo, the governor of Bank Indonesia?
Judging by the Indonesian central bank’s successive 25bp rate cuts in August and September, both of which surprised economists, you might think he was fond of the shock and awe approach. But Martowardojo sees himself as quite the opposite — and claims the need to communicate clearly to the market helped delay one of these cuts.
“Our opportunity to cut policy rates was in July,” he says. “But when we reviewed our communication we hadn’t signalled to the market about the possibility… I remember we were at the [monetary policy] board meeting until almost midnight because we were drafting a press statement to give a signal that if inflation, the balance of payments and other data support us, we will take the opportunity to cut rates.”
Out with the old
Martowardojo’s emphasis on clarity has extended to the policy rate. As well as being among the most active central bankers in the world last year in terms of policy decisions — cutting rates six times — he was also one of the clearest reformers. He dumped the old 12-month policy benchmark rate, picking a seven-day reverse repo rate as the main policy tool in its place.
The move has won plaudits from analysts; DBS called the old policy rate “irrelevant”. For Martowardojo, it was an obvious step to take. “The 12-month rate was not transactional; you could not hit it,” he says. “But you can hit the seven-day reverse repo rate.”
This attempt to improve the transmission mechanism — the means through which central bank policy decisions get fed through to the wider economy, generally through bank lending rates — is by no means a panacea. Kartika Wirjoatmodjo, Bank Mandiri’s president, has said that non-performing loans are a bigger hindrance to credit growth, which fell into single digits this year. Jahja Setiaatmadja, president director of Bank Central Asia, told GlobalMarkets that lower lending rates at his bank have not led to a predictable increase in loan demand.
But the change to the policy benchmark was just one part of a transformation plan unveiled in October 2014, less than 18 months after Martowardojo took office. As well as revamping the policy rate, Martowardojo has also changed the reserve requirement, shifting the 6.5% requirement from a daily posting to a two-week average. But although he sees room for major transformation in the country’s capital markets, he says the bulk of the work reforming the central bank is done. That leaves him focusing on familiar tools — in particular, the question of where rates should go next.
Indonesia is in an enviable position. The ADB thinks the country will grow 5.1% this year and 5.3% in 2018; the World Bank also sees 5.3% growth in 2018 but has a slightly more rosy 5.2% projection for this year. Nor is inflation a major headache for the central bank. The ADB slashed its 2018 inflation projection in September, cutting it to 3.7% from the 4.5% it predicted earlier this year.
This appears to give Martowardojo more wiggle room to cut interest rates, GlobalMarkets suggests.
He is not so sure. And although Martowardojo identifies himself with the more transparent style of central banking, the nature of the job means certain buzzwords are unavoidable. After two rate cuts in two months, he has kept repeating one word in particular.
“After the last board meeting on September 22, we mentioned that we believed [the most recent 25bp rate cut] was sufficient,” he says. “That was the word: ‘sufficient’. I hope the market can read what that means.”
Asked whether he will stay on at the central bank, as he is allowed to, after his five-year term expires in May 2018, he suggests it is time to stand aside to let his successor shoulder the burden. “My focus is to end my service so I can work together with the new governor and hopefully he can continue,” he says. “Hopefully the system will find a good central bank governor.”