Jakarta (Reuters) – Indonesia’s central bank said on Tuesday that the reserve requirement ratio (RRR) for banks would be raised more quickly. The bank expects inflation to rise slightly above its target range this year, but it kept interest rates at a record low.
BI said that the RRR would go up more quickly and told banks to put away 7.5 percent of their reserves starting in July and 9 percent starting in September. This was different from what BI had said before, which was that it would raise the RRR three times this year, from 3.5 percent to 6.5 percent in September.
Reuters polled 25 of the 27 economists and BI left the benchmark 7-day reverse repurchase rate at a record low of 3.50 percent. Its other two main rates also stayed the same.
During the pandemic, BI cut interest rates by a total of 150 basis points and pumped billions of dollars into the financial system. The RRR hikes were the first step to normalizing monetary policy.
Governor Perry Warjiyo said that inflation will be a little bit higher than the BI’s target range of 2% to 4% this year, but that it will drop back to the target range next year, which he called “manageable.”
Warjiyo said that the inflation outlook makes it less important for the central bank to respond with interest rates like other central banks do.
In an online news conference, he said, “The acceleration of liquidity normalization is a step for BI to keep things stable while continuing to support growth and loans to the business world.”
The additional RRR hikes are expected to take $7.51 billion worth of liquidity out of the banking system, which is worth 110 trillion rupiah. However, Warjiyo said that this shouldn’t affect the ability of lenders to lend.
He has said in the past that BI would keep interest rates at record lows until it saw signs that core inflation was being pushed up. In April, the annual rate of inflation hit a two-year high of 3.47 percent.
Last week, the government got approval from parliament to increase energy subsidies by $24 billion. This is to keep most energy prices the same and slow down rising inflation.
Radhika Rao, a senior economist at Singapore’s DBS Bank, said in an email that energy subsidies had lowered the risk of inflation.
“This, along with the limited depreciation of the rupiah against other currencies in the region, made it less important for Bank Indonesia to normalize policy,” Rao said, pointing out that “non-rate levers” like RRR were being used to absorb liquidity.
In the past few weeks, the rupiah has been under pressure because people expect the U.S. to raise interest rates more quickly. However, it hasn’t dropped as much as some other Asian emerging market currencies.
But Maybank Indonesia’s economist, Myrdal Gunarto, said that BI will start to raise interest rates at the June policy meeting because inflation is expected to be higher than the benchmark rate level. He thinks that rates will go up by 75 basis points this year.
Indonesia’s economy grew by 5.01 percent in the first quarter. This was due to a rise in exports of commodities and the fact that COVID-19 restrictions were lifted.
BI kept its GDP forecast for 2022 at 4.5–5.3 percent.
($1 = 14,655.0000 rupiah)
