Indonesia governor says will signal policy rate moves ahead of time

  • Bank Indonesia (BI) Governor Perry Warjiyo said the central bank does not expect inflation to top 3% until 2023, but the central bank would start communicating possible changes to its policy rates ahead of time to avoid any market shocks.
  • With the economic outlook brightening, the Indonesian central bank plans to start reducing liquidity in the banking system in 2022, rolling back loose monetary policy used to weather the pandemic, although it is closely monitoring the spread of the Omicron variant of the coronavirus.
  • BI has injected more than IDR860tr (USD59.74bn) of liquidity into the financial system since 2020, including through direct purchases of government bonds, and slashed key rates by 150 basis points to help cushion the economic hit from the health crisis and anti-virus measures.
  • Warjiyo reiterated that BI will keep the main policy rate at a record low 3.50% until inflation shows signs of accelerating.
  • “Our current projection is inflation starting (to rise) above 3% and moving up towards 4% sometimes in 2Q23 or early 3Q23,” he said in an interview during a Reuters Next conference.
  • “But by nature, interest rate decisions need to be forward looking, needs to be preemptive, need to be front loading,” he added.
  • BI will mop up liquidity and will start signaling toward the end of the year further policy direction, depending on trends in inflation and growth, Warjiyo said.
  • Bank Indonesia will communicate with markets the liquidity reduction plan ahead of time, he said, adding that the central bank will make sure the move will not compromise banks’ ability lend or purchase government bonds.
  • Indonesia will make sure that yield differential between rupiah assets and U.S. Treasury yields will remain attractive for investors to avoid massive outflows as the Federal Reserve is expected to start raising rates 2022.
  • Warjiyo said the central bank will not hesitate to “come to the market” to stabilise the IDR if needed.

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