JAKARTA: Bank Indonesia (BI) plans to begin reducing liquidity on domestic financial markets next year, in response to signals from the United States Federal Reserve (Fed) that it is likely to start retracting its “easy money” policy this year.

       BI governor Perry Warjiyo said the bank planned to raise its benchmark seven-day reverse repo rate (7DRRR) by the end of 2022, among other measures.

       He said the Fed had indicated a willingness to start reducing asset purchases before the end of the year but would likely hold the US benchmark rate until late 2022.

       “In terms of monetary policy, (BI) needs to recalibrate. Next year, we plan to begin reducing liquidity, which has been very loose,” Perry said.

       Perry’s remarks signalled a possible end to the loose monetary policy that has been in place since the Covid-19 pandemic struck Indonesia.

       Indonesia Central Banks

       BI has cut the 7DRRR six times since February of last year, bringing it to a record low of 3.5% to date, in an attempt to support economic recovery.

       Despite the withdrawal, Perry said, BI’s plan would not negatively affect economic growth or the loan disbursement target for next year, noting that the country had had very loose liquidity since March 2020.

       “A small reduction (in liquidity), we believe, will not dampen the economic growth and lending disbursement,” Perry said.

       The Fed’s tapering signal strengthened following improving economic growth, falling unemployment rates and rising inflation in the US.

       Finance Minister Sri Mulyani Indrawati said during the same hearing that government bond yields would be kept high next year – at 6.8% as per the 2022 state budget – to safeguard against capital outflows, because the Fed’s taper would also raise US yields.

       She rejected Commission XI’s demand to lower the state budget’s bond yield assumption to 6.7% for next year. The yield averaged 6.17% in the first half of this year.

       “If we do not make adjustments, there could be what the governor said earlier: a capital outflow,” she said.

       Should the need arise, the government could use the burden sharing scheme with BI to “guide” the market, added Sri Mulyani. — The Jakarta Post/ANN