JAKARTA: Indonesia’s central bank announced yesterday a surprise 300 basis points of staggered hikes in the reserve requirement ratio (RRR) for banks over the next eight months, in one of its first concrete signs of monetary tightening.

       At its first policy meeting of the year, Bank Indonesia (BI) kept its benchmark seven-day reverse repurchase rate steady at 3.50%, as expected in a Reuters poll. It also left two other main policy rates unchanged.

       But in a sign that BI has a keen eye on the United States Federal Reserve’s (Fed) anticipated tightening and potential jolts to Indonesian financial markets, governor Perry Warjiyo announced three RRR hikes, starting with 150 basis points (bps) in March, 100 bps from June and another 50 bps from September to contain liquidity.

       “For the time being, our focus is on maintaining stability amid normalisation by the Fed, while at the same time supporting the economic recovery,” he said in an online news conference.

       In total, BI will mop up about 200 trillion rupiah (US$13.95bil or RM58.38bil) of liquidity with the RRR moves, Warjiyo said, but he assured that banks will still have enough for lending and buying government bonds.

       Banks’ current liquidity levels are “very very loose”, he added, due to two years of quantitative easing that BI said was among the biggest in emerging markets.

       BI has had to adjust its policy in the past when the Fed tightened because the rupiah is among Asia’s most risk sensitive currencies and vulnerable to capital outflows.

       Since 2020, BI had cut interest rates by 150 bps and injected a total of 874.4 trillion rupiah (US$61bil or RM255.24bil) to cushion the economic fallout from the Covid-19 pandemic.

       While BI will continue to take measures to ensure the stability of the rupiah and bond yields, some flexibility will be needed, the governor said.

       The policy mix was decided assuming the Fed will raise rates four times this year starting in March, which will take US Treasury yields up by two percentage points or more, he said.

       BI has had to adjust its policy in the past when the Fed tightened because the rupiah is among Asia’s most risk sensitive currencies and vulnerable to capital outflows.

       “The decision to raise the reserve requirement ratio from March suggests that rate hikes will come sooner than we had previously expected,” Capital Economics said in a note to clients.

       “However, when the rate hike cycle does begin, we think it will be gradual,” the note said, predicting BI would raise its main policy rate by 25 bps this year with more increases in 2023.

       Radhika Rao, a DBS economist, said with BI’s “hawkish underpinnings”, markets will likely bring forward and increase rate hike expectations for this year.

       Analysts have said Indonesia would fare better this time compared with previous US tightening cycle as South-East Asia’s largest economy benefits from a global commodity boom, which has kept the currency relatively stable and improved the country’s balance of payments.

       On the domestic front, BI maintained all economic assumptions, including 2021 gross domestic product growth of between 3.2% to 4% and 2022 growth at 4.7% to 5.5%, saying that main indicators have continued to improve.

       Indonesia’s economic recovery was disrupted by an outbreak of the Delta variant in July-August last year, which slowed growth to 3.51%. Analysts said economic momentum has since picked up, although they noted the Omicron variant outbreak presents a new risk. — Reuters