MNI STATE OF PLAY: BI Hikes Reserve Requirement, Rates On Hold

Indonesia’s central bank tightened lending conditions by raising the statutory limits that commercial need to hold as reserves, but kept the benchmark policy rate unchanged.

The benchmark 7-day reserve repo rate was kept at 3.5%, the level it has been since 2020, with the overnight deposit facility rate and the lending facility rate maintained at 2.75% and 4.25%, respectively.

Less expected, however, was another hike in the reserve requirement ratio for commercial banks, which will now need to retain 7.5% of their reserves from July and 9.0% from September. This is the second RRR hike this year and follows an earlier policy move that had the rate rising to 6.5% by September after three staggered increases.

BI said the move would “accelerate the normalization of liquidity policy” but would not constrain lending, and banks which lent to “priority sectors” would be given a discount of up to 2% on the RRR.

BENCHMARK RATES

The benchmark rate was left unchanged “in line with the need to control inflation and maintain exchange rate stability, as well as continue to encourage economic growth, amidst high external pressures,” Governor Perry Warjiyo said.

Warjiyo said trade remained strong and domestic demand was improving.

Indonesia's inflation is running at 3.47%, still sitting inside the central bank’s 2% to 4% target range, although prices have risen sharply in the last few months. February inflation was at 2.06%.

The rupiah weakened Tuesday to around 14,678 against the USD. The cross-rate began the year at 14242.

BI has maintained its forecast that economic growth will range between 4.5% and 5.3%, following and actual print of 5.01% annualised growth in Q1 2022.