JAKARTA – Indonesia’s central bank on Tuesday announced a more aggressive rise in the Reserve Requirement Ratio (RRR) for banks, with inflation expected to rise slightly above its target band this year, but keeping interest rates at record lows.
Bank of Indonesia (BI) has announced rapid growth in RRR, instructing banks to park 7.5% of their reserves and 9% from September. This compares favorably with BI’s previously announced policy path, where BI set three staggering RRR increases from 3.5% to 6.5% in September this year.
The BI benchmark 7-day reversal retracement rate is at a record low of 3.50%, as expected by 25 out of 27 economists surveyed by Reuters. Its other two major rates were also unchanged.
During the epidemic, BI cut interest rates by a total of 150 basis points and injected billions of dollars into the financial system, and the RRR increase was the first step in normalizing monetary policy.
Governor Perry Wargio said inflation would be slightly above the BI’s 2% to 4% target this year, but would fall below the target next year, which he described as “manageable.”
The inflation outlook “reduces the need to respond through interest rates like other central banks,” Wargio said.
He had earlier said that the BI would maintain a record low interest rate until there were signs of pressure on core inflation.
April’s annual inflation rate was 3.47%, the highest in two years.
The government last week received parliamentary approval to increase energy subsidies to 24 billion to keep most energy prices unchanged to keep inflation modest.
Radhika Rao, a senior economist at DBS Bank in Singapore, said in an email that energy subsidies have reduced the risk of inflation.
“This combined with the regional rupee’s limited rupee devaluation has reduced the urge to normalize Bank Indonesia’s policy,” Rao said, referring to how “non-rate levers” such as RRR are being used to absorb liquidity.
Indonesia’s economy grew 5.01% in the first quarter, boosted by product exports and a resumption of the economy from COVID-19 resistance. (Reporting by Gayatri Suroyo, Stefano Sulaiman and Francesca Nangoy Ed Davis)