Indonesia’s central bank lifts reserve requirement ratio

Bloomberg

Indonesia’s central bank tightened reserve requirements for lenders, while keeping its benchmark interest rate unchanged, as it seeks to withdraw excess liquidity without hurting economy’s recovery from the pandemic.
Bank Indonesia plans to raise the reserve requirement ratio for banks to 9% in September from previously announced 6.5%, Governor Perry Warjiyo said in a briefing on Tuesday. It left the main seven-day reverse repurchase rate at 3.5% as forecast by 20 of 30 economists in a Bloomberg survey.
The bump in the reserve ratio will force lenders to park more money with the central bank. The move will absorb 110 trillion rupiah ($7.5 billion) of liquidity from the banking system, Warjiyo said, and comes after he flagged a 200 trillion rupiah reduction from steps announced in January.
Indonesia’s government bonds edged lower after the decision, while the rupiah was more muted, having strengthened about 0.2% against the dollar earlier on Tuesday. The Jakarta Composite Index held gains after the decision, up 1.1% at market close.
BI’s move complements the government’s efforts to check price pressures by absorbing energy costs through subsidies this year. That has given Bank Indonesia more room to keep its key rate at a record low to support the economy, even as its regional peers in Malaysia and the Philippines joined other central banks in raising borrowing costs to combat
inflation.
Although headline inflation in Indonesia climbed to a three-year high of about 3.5% fanned by volatile food costs, the core inflation measure tracked by Bank Indonesia for setting policy has remained below 3%.
The central bank, which retained the 2%-4% inflation target band for the current year and the next, said it sees price gains breaching its upper tolerance limit in 2022 before returning to target in 2023. It maintained its economic growth forecast for this year at 4.5%-5.3%, a level closer to the rate of expansion seen before the pandemic.
“It remains very much a matter of when, not if, a rate hike will come,” said Wellian Wiranto, economist at Oversea-Chinese Banking Corp. in Singapore. “The fact that it steepened the RRR hike trajectory speaks to BI’s implicit acknowledgment that monetary policy tightening is the new sheriff in town.”
Liquidity remains ample despite the earlier RRR hikes, with bank lending growing over 9% year-on-year in April, its fastest pace since mid-2019, based on data compiled by Bloomberg.