JAKARTA (Reuters) – Indonesia’s central bank may hike its reserve requirement ratio (RRR) further if inflation starts to pick up, while the option to raise interest rates will be its last resort, its senior deputy governor said in a seminar on Friday.
Bank Indonesia (BI) has already started normalising some of its pandemic-era ultra loose monetary policy by announcing three hikes in the RRR by 300 basis points between March to September.
“If necessary, if we’re looking at liquidity still ample and inflation starts picking up, we may use further increases on the reserve requirement ratio,” Destry Damayanti said, adding that BI will be careful so that its monetary tightening measure does not hurt the ability of banks to lend.
Her comments came as inflation expectations build in Southeast Asia’s largest economy, despite the March inflation rate of 2.64% remaining within BI’s target band of 2% to 4%.
BI has said inflation should keep within target this year, but plans by the government to adjust subsidised energy prices could present an upside risk.
Destry, BI’s second most senior official, said the central bank anticipated inflation and trade disruptions from a prolonged war in Ukraine to be the most critical issues for Indonesia’s economy in the short term.
BI was ready to raise its benchmark 7-day reverse repurchase rate if necessary, she said.
But the timing of its first rate hike would be “at the end, if all our instruments are not enough to handle the inflation problem,” she said.
The benchmark rate is currently at a record low of 3.50%, after being reduced by 150 basis points during the pandemic.
Destry reiterated that BI’s monetary policy response will be aimed at anchoring core inflation pressures, instead of in direct reaction to any fuel price hike.
Core inflation has remained manageable so far and BI had yet to see the kind of pent-up demand that had occurred in more developed economies after the easing of COVID-19 curbs, she said.
(Reporting by Gayatri Suroyo; Editing by Ed Davies)