Bank of Indonesia sends first hints of policy normalisation

[JAKARTA] Indonesia's central bank gave the first signs on Thursday (Jan 20) that it will begin normalising policy soon, even as it left its benchmark interest rate unchanged.

Bank Indonesia (BI) kept the 7-day reverse repurchase rate at a record-low 3.5 per cent at its first monetary policy meeting of 2022, as predicted by all 29 analysts in a Bloomberg survey. In a briefing in Jakarta, governor Perry Warjiyo said BI will start raising banks' reserve requirement ratio (RRR), with an increase to 5 per cent in March.

"BI is trying to have its cake and eat it too," preparing to normalise policy while encouraging lending growth through macroprudential measures, said Wellian Wiranto, economist at Oversea-Chinese Banking Corp in Singapore. "To that end, a gradual tightening of RRR is in the pipeline too."

The Jakarta Composite Index pared its gains after the decision, and was up 0.3 per cent as at 2.39 pm local time.

South-east Asia's biggest economy has rebounded strongly from last year's recession, but the recovery may be hampered by the spread of the Omicron coronavirus variant, which has driven new Covid-19 cases to their highest level in 3 months. While the government has refrained from tightening curbs, a worsening local outbreak could force its hand.

Bank Indonesia is trying to pull off a balancing act between reviving the economy - seen expanding 4.7-5.5 per cent this year - and supporting the currency as it embarks on a "pro-stability" focus for 2022.

The rupiah has been under pressure as investors pulled funds amid expectations for faster US rate hikes, declining 0.75 per cent against the US dollar so far this year, Asia's second-worst performer.

Meanwhile, the trade surplus could shrink further due to a coal export halt and rising demand for imported goods, eroding support for the currency. Benign inflation is giving the central bank room to breathe, as price gains are on course to meet BI's 2-4 per cent target this year after hovering below that range for all of 2021.

BLOOMBERG