Indonesia central bank holds rates, sees no need to act until price risks grow

[JAKARTA] Indonesia's central bank left interest rates at record lows on Thursday (Mar 17), while acknowledging risks stemming from the war in Ukraine and rising energy prices, but ruled out a need to hike rates until there was a fundamental increase in inflation.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at 3.50 per cent, as expected by all economists in a Reuters poll. Its 2 other policy rates were also unchanged.

Governor Perry Warjiyo said the conflict in Ukraine was boosting global energy prices, but he said any impact that would have on domestic inflation would depend on the government's fiscal policy.

"I would like to stress that monetary policy responds to a fundamental rise in inflation, which is core inflation, and does not respond to a rise in volatile food or administered prices,"the governor said, repeating a pledge to keep interest rates unchanged until inflation rises.

The government has kept prices of the most widely used fuels unchanged so far by providing subsidies and Warjiyo said BI was coordinating its policy with the government.

While noting growing uncertainties over the global impact of the war in Ukraine and rising prices, the central bank maintained its 2022 GDP growth target at 4.7 per cent to 5.5 per cent and reiterated it sees inflation ending the year within its 2 per cent-4 per cent target range. February's inflation rate was low at 2.06 per cent.

BI's plans to normalise pandemic era policy could also be influenced by US monetary tightening plans.

The rupiah has only slipped 0.4 per cent against the dollar so far in 2022, but the Federal Reserve has flagged 6 more rate hikes this year after it raised borrowing costs on Wednesday for the first time since 2018.

Even with uncertainty caused by the war and the shift to tighter monetary policy in the US, the rupiah has been holding up well, Capital Economics said in a note.

"Provided this remains the case, the central bank will be in little hurry to tighten," said senior Asia economist Gareth Leather. Capital Economics sees just one 25 basis point hike this year.

BI has cut interest rates by a total of 150 bps and injected billions of dollars of liquidity into the financial system since 2020 to help South-east Asia's largest economy weather the pandemic. It began to unwind all of that with reserve requirement ratio hikes starting in March.

Most analysts polled by Reuters earlier this month believe BI will only start raising rates in the third quarter, though over 1/3 of respondents expected a hike as soon as next quarter. REUTERS